Reading the often dark headlines of our national newspapers, one could be forgiven for thinking that the retailing sector is a disaster zone for investors. There have been some high profile corporate failures over the past year, and the S&P/ASX 300 retailing sector has dropped like a stone since around August 2016.
That’s a shame, as for the average investor, the retailing sector is an often a fertile hunting ground for stocks – as business models are perhaps a little easier to understand, and many business have quite familiar brand names.
So why is retailing so weak? The intensifying threat from internet rivals is an obvious factor, and the looming threat of a more locally established Amazon will only accentuate these concerns going forward. Other consumer discretionary areas such as the media have also been under pressure from global internet giants.
At the same time, while overall consumer spending volumes have been growing at a fairly reasonable pace in recent years, street-level competition has been fierce and prices have been under downward pressure. It’s also the case that consumers are tending to prefer to spend on service related “experiences” than the stuff usually found in retailing shops scattered around our malls.
All these are structural forces. The extra bad news, however, is that new cyclical pressures could be soon brought to bear. So far this year, retail spending has slowed down considerably, with annual growth now at its weakness pace in four years. Consumer confidence has also tumbled, reflecting persistently weak income growth, a growing band of underemployed and discouraged workers, and rising fears about a house prices correction in the hot markets of Sydney and Melbourne.
Given this depressing background, I thought it would be interesting to run a scan of one-year price performance across the retailing sector and see what the results throw up.
As might be expected, the high profile troubles of SurfStich (ironically an online retailer!) fared the worst, with a 85% price decline over the past year. Next in line was mobile phone retailer Vita Group, with a 76% price decline – thanks to intensifying competition in the market, and in particular a toughening in terms from its leading supplier, Telstra. Toy wholesaler Funstastic has suffered a 74% price decline, which suffered over recent years, in part because more retailers are directly purchasing what they want from Chinese suppliers.
I could go on, but you get the picture – there are some obvious car crashes in the sector, as shifts in the competitive landscape challenges existing business models. But this begs the question: are there any retailers that have managed to do well given the challenging business environment? It turns out there are.
Top of the list of performers is jewellery retailer Lovis Holdings, with a 107% price gain over the past year. With the internet perhaps not challenging jewellery (at least as yet) the company is enjoying success and rolling out more stores. Next in line is internet challenger in the travel market Webjet, with a 95% price gain.
And despite the tales of woes in the fashion industry, traditional bricks and mortar womens’ clothing store chain Noni B has also done well, with a 61% price gain over the year. And profiting from the home building boom, other winners include bedding and kitchen retailer Joyce Corporation (58%), and furniture retailer Nick Scali (50%).
The bottom line of this analysis is that even in a sector that faces both structural and cyclical challenges, pockets of potential can still be found. I commend all retailers that are managing to profit in such difficult times, and their ability to succeed in such an environment suggests their management is particularly strong and perhaps bodes well for their future. Indeed, not all retailing business exposed to the property boom or the internet have managed to succeed in recent times, suggesting external tail winds can only take you so far.
Meanwhile, investors should also note that don’t only have the choice of picking among local Australian companies if they want to buy into familiar consumer orientated brand names. Indeed, thanks to the advent of exchange traded funds such as the BetaShares Nasdaq-100 ETF (ASX Code: NDQ), it’s now possible to buy exposure to those global giants – like Amazon, Apple, FaceBook and Google – that are most threatening to disrupt local consumer-related companies. As least as regards Australian investors, it’s a case of if our companies can’t beat them, you might as well join them.
As least as regards Australian investors, it’s a case of if our companies can’t beat them, you might as well join them.
