We’re going to get a ripping taste of how markets work in the next month or two.
Look at this screenshot I grabbed yesterday from The Australian Financial Review…
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| Source: Australian Financial Review |
You can see that the headlines story was the Godfrey’s chain going bust.
This news coincided with the release of the latest retail data from the Australian Bureau of Statistics.
Here’s commentator Terry McCrann on how dire these results look:
‘Over the December year retail sales rose just 0.8%.
‘Bring in inflation and population growth, and real per capita sales fell something like 6 per cent-plus.’
Combined, these two factors might be enough to spook you off retail shares.
However, the high likelihood is that the share market has already ‘discounted’ this weak spending. This news is old as far as the market is concerned.
I don’t read too much into the Godfrey’s bankruptcy, either. It was a tired brand, and already on life support.
Why do you care about this?
Retail stocks have every chance of rallying over the next year.
I should say that some are already going up.
Nick Scali [ASX:NCK] and JB HiFi [ASX:JBH] are up 16% and 30% since late October.
These are two of the bigger listed retailers.
The smaller retailers look prospective for potential gains too.
What makes me say that?
Kogan.com [KGN] is up 30% in the last three days! This big spike has come after their latest trading update.
What was in it?
Gross sales were down but their margin, profitability and subscriber base are improving. The company also has $80 million in cash.
In other words, the market — previous to the release — had become too negative on the Kogan outlook.
I’m not saying you should buy Kogan. I don’t know enough about it to say buy, hold or sell.
But you can see the discrepancy between the impression you get from mainstream media…and what is happening on the share market.
It’s been a tough two years for a lot of stocks.
A lot of the listed retailers were hammered, in terms of share price.
Things only need to get ‘less bad’ for them to potentially start rallying.
Remember that the share market is not pricing in what’s happening now…but what will be happening in 9–12 months.
Do we have evidence that spending will be better in January 2025?
I think we can make a good case.
The RBA should be cutting rates by the second half of this year.
Certainly, you’d think that weak ABS retail spending data kills any further chance of rate hike.
We also know tax cuts are coming in after 30 June. This is a boost for consumer spending…no two ways about it!
Here’s some more good news from the AFR today…
‘Wholesale electricity prices fell sharply across the country last year, according to the energy market regulator, adding weight to expectations that households and small businesses will finally find relief after two years of soaring power bills.’
I’ll take that too.
Just from above, we see that the general Aussie consumer — you and me, in other words — is set for mortgage relief, tax relief and power bill relief.
We also know that retail stocks are ALREADY hammered since the sector highs of 2021.
Here’s two ideas to keep an eye on:
Adairs [ASX:ADH] sells household bedding, homewares and furniture across 140 stores around Australia.
It’s got a $300 million market cap at about $1.74 per share. Adairs is down about 40% in the last 12 months.
That’s a lot of bad news battered into the share price now. Adairs’ half year results are due 26 February. I suggest you watch how the stock reacts on that day.
I remember researching Adairs a while back for a short-term trade.
One thing that struck me was the average spend per visit in Adairs is quite small — under $50 from memory.
I liked that insight then, and I like it now. It’s natural for buyers to baulk on big ticket items that cost several thousand dollars when they are under the pump.
But change out of a pineapple to spruce up the house or for a bit of retail therapy? Seems less of a bar to jump.
Generally speaking, I’d suggest Adairs’ target demographic is the older female. It’s a durable market.
It’s a similar demographic for Myer [ASX:MYR].
Myer trades for about 67 cents with a $560 million market cap. It’s hard for me not to see Myer as anything good value.
Here’s why…
Myer, at last accounts, had $120 million in net cash.
That means, as a rough approximation, you’re paying $440 million for a business with over $3 billion in sales.
Of course, there’s a limit to what the market will pay for the ‘old’ department store business model.
But Myer is growing its online sales — and is one of Australia’s most trusted brands.
We also know billionaire Solomon Lew owns a hefty chunk via his firm Premier Investments. That’s a powerful player invested in the company.
Again, keep an eye out for the market reaction to Myer’s next trading update.
If ADH and MRY rally on their next results, you’ll have a good idea to think the retail bear market since 2021 is over.
Best,
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Callum Newman,
Editor, Small-Cap Systems
and Australian Small-Cap Investigator
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