MoneyTalks: Stals' unexpected ASX stakes on retail royalty

MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from Stake market analyst, Megan Stals

Despite the RBA’s latest decision to hold the official cash rate again at 4.1%, soaring fuel prices, services inflation, increasing rents and interest payments are all hitting consumers hard, Megan Stals, market analyst at Stake told Stockhead this week.

“This was reflected in the latest retail figures, which came in lower than expected, despite rapid population growth. With national accounts data showing that household deposits showed the first quarterly decline since June quarter 2007, there are clear signs that a per capita recession is taking hold.

“During recessionary periods, investors will often look to consumer staples stocks as a safe haven, but even Coles and Woolworths have seen recent falls, as increased theft, higher leasing costs and strikes place risk on profits.

“Understandably, many investors will be staying clear of retail-related stocks for the time being, but this doesn’t mean there aren’t opportunities.”

Stals’ Stakes:

The Reject Shop (ASX:TRS)

“One recent success is the discount variety retailer, The Reject Shop, which has seen its share price rocket almost 30% in 2023, as consumers actively look for more affordable options as household budgets are constrained.

“Cash-strapped consumers are more willing to go out of their way to find cheaper prices, even if that means they are sacrificing convenience. This means The Reject Shop has been able to grow sales by 5.8% in the last financial year and return to profitability, despite not stocking full grocery or household offerings.

“Given the impressive returns this year already, it’s important to understand whether further growth is possible. While it has been working on cost efficiencies, potential for further growth will primarily depend on its plans to expand, with 15 new stores on the horizon. Store expansion can be a risky move due to the increased overheads, but given the brand’s successful opening of 11 stores last year, its strong net cash position, and its ability to rent less premium locations, there are promising signs.

“While it’s arguable that given a P/E of 21, there could be better value on the market, but The Reject Shop appears to have momentum on its side.”

Reject Shop share price charts

Wesfarmers (ASX:WES)

“Wesfarmers, the parent company to cost-conscious retail brands Kmart, Bunnings, Officeworks, Priceline, and Catch, continues to perform well as consumers feel the squeeze. Kmart was a retail standout in Wesfarmers’ earnings, with sales increasing by 8.8% as consumers look for cheaper options. Given the brand presence, Kmart is the go-to option for many consumers.

“Meanwhile, the large population growth we’re seeing could benefit Bunnings, as this tends to drive sales across home improvement and DIY.

“Although the share price fell by 1.9% in September, it managed to outperform the wider S&P/ASX 200 benchmark which fell 3.5% in the same month, and recent economic data suggests there are some headwinds for the company with rising fuel costs impacting logistics and supply costs.

“A key consideration when considering investing in Wesfarmers, is that it’s an incredibly diverse collection of businesses that are not clearly correlated. For instance, while its retail portfolio has performed well, WesCEF — its chemicals, energy and fertiliser unit — saw revenue fall by over 3%.

“In addition, its planned acquisition of PetBarn owner Greencross could result in short term volatility. That said, these segments could be buoyed by Bunnings and Kmart, whose combined divisions accounted for approximately two-thirds of revenues in FY23.”

Wesfarmers share price charts

Cettire (ASX:CTT)

“Though many Australians seek cheaper alternatives, the consumer spending crunch is not affecting everyone equally. In fact, despite deposit accounts showing signs of weakness, household wealth actually increased for those fortunate enough to own assets, due to property price increases, and strong international market performance driving up superannuation. In a sign of the times, this means that spending on luxury goods has not been impacted as much as some other sectors.

“We’ve seen this play out regarding the luxury fashion platform, Cettire (ASX: CTT), which has seen remarkable 1-year returns of over 290%.

“In FY23, Cettire’s average order value increased by 6%, while active customers grew 63% YoY. This customer acceleration commenced in April 2023 and ran through to the end of the financial year, underpinned by a localisation strategy that included the brand deploying multi language features, including a Chinese language site.

“As a technology focused and highly automated business, Cettire is able to function with a lean cost base to maximise profit in the personal luxury market — an over AUD$500 billion global market growing at 6% per annum. However, given its position as a ‘tech’ stock, this means its performance is often correlated with the broader tech sector, and it has an extreme P/E of over 70 — meaning value investors will be steering clear.

“Cettire is progressing its plans for entry into China which could be a strong long term opportunity, but it’s no secret that there are a lot of red flags with that region’s economy right now.”

Cettire share price charts

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.