MoneyTalks: Why Myer is suddenly back on the radar of ASX retail stock hunters
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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 Datt Group managing director Emanuel Ajay Datt on ASX retail stocks.
Despite the economic volatility and rising interest rates, Datt said ASX retail stocks are showing signs of resilience. For the past month consumer discretionary stocks are marginally up 0.54%, while consumer staples have risen 4.59%.
“ABS retail data demonstrates that retail spending has not ‘fallen off a cliff’ as per market expectations but rather that consumers continue to invest in improving their home environment despite rising interest rates,” he said.
“Rising interest rates are actually pointing towards lower housing churn and we believe it’s likely that homeowners will focus on improving their existing home versus upgrading, which is good for home retail.”
He said it’s important for investors in ASX retail stocks to understand the underlying factors underpinning retail businesses.
“For example, past economic crises have demonstrated the resilience of certain segments of the retail market. In particular, we observe that brands or sectors that are perceived to be better ‘value’ for money have defensive attributes and therefore tend to do better in a broader downturn.
“Everyday retailers such as supermarkets and discount stores tend to outperform in these conditions.”
Datt said conversely, aspirational or higher value brands tend to be more cyclical and more closely linked with broader economic influences.
“These can include higher ticket retailers such as furniture, whitegoods and luxury brand suppliers,” he said.
“Armed with this knowledge, an investor can tailor their portfolio exposure appropriately to their risk appetite.”
Furniture retailer Nick Scali (ASX:NCK) saw its share price rise 3.5% on Monday to $10.34 after coming out with its FY22 results, which Datt reckons looks pretty good, despite recording underlying net profit falling after tax of $80.2 million, down $4.9% on FY21.
The company has attributed the fall to China lockdowns in H2 causing customer delivery delays and revenue referral.
“Good improvement in top line revenue at +18% offset by a reduction in profit margins driven by a higher CODB (cost of doing business),” Datt said.
“The company has an increase in outstanding order book and the store network provides a solid base to build upon for FY23.”
In November 2021 NCK completed the acquisition of Plus-Think Sofas for $10.5 million, with the company announcing the integration is now substantially complete.
“Company has guided towards material increase in revenues for H1 FY23 however, supply chain challenges continue to be a risk,” Datt said.
According to Datt, department store Myer, which traces its history back to the prosperous gold rush days in Victoria, is actually one of Australia’s best online retailers and may be a good ASX retail stock during this tricky period for investors to navigate.
“Myer sells a range of retail goods and has improved its business materially over the past three years, and continues to increase the efficiency of its cost base,” Datt said.
“Despite its bricks and mortar history, hidden within the company is one of Australia’s best online retail businesses.
“Major shareholder, Premier Investments, has been increasing its stake and we believe a takeover would realise many synergies between the two companies.”
Rich-lister Solomon Lew’s Premier Investments lifted its stake in Myer from 19.88% to 22.87% earlier this month. In July Myer flagged to the market strong profit results for FY22, seeing its share price jump ~22.5% in the past month to 49 cents/share.
Datt said another long time retailer discount variety story chain, The Reject Shop, sells a range of everyday goods that typically persist throughout the economic cycle.
The Reject Shop has seen its price rise more than 11% in the past month to $4.50/share but Datt said it still represents good value.
“The company looks very cheap on an EV basis, whilst also holding >$100 million of cash,” he said.
“Major shareholder, KIN Group, have previously bid for the business and the company looks attractive as a takeover prospect given its cash holdings, debt free and cash generative nature.”
The budget retailer has also been a top pic of VP Capital co-founder John So during this inflationary period.
If you’re walking through a shopping complex you can usually find Dusk from its strong scent, popular among tween and teen girls. Dusk sells a range of homewares but is best known for its scented candles and diffusers.
“Dush has just commenced opening stores in New Zealand and we expect to see further international expansion in other regions as time goes on,” Datt said.
“The business continues to be profitable and well-run.”
The Dusk share price is down 0.44% in the past month to $2.26.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee 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.