Stocking up on retail

PORTFOLIO POINT: Consumer spending levels are set to increase, and there are some retail stocks that stand to benefit during the Christmas period and beyond.

With the festive season fast approaching, I thought it might be an opportune time to examine the retailers that are set to benefit from a share of your hard earned “Santa dollar”.

Whilst I have been very selective with retailers in recent times, there does seem to be a light at the end of the tunnel for the long suffering retail sector (and I am pretty sure it’s not a train coming the other way). Many retailers have been sorely tested through a cyclical and structural decline that had its genesis in the GFC and was exacerbated by the strong Australian dollar and a shift to online shopping.

Indeed, the last five years have been nothing short of a perfect storm for the high street, with the much-coveted discretionary consumer ducking for cover to repair their personal balance sheet, cheap offshore goods causing price deflation, and even landlords mercilessly lifting rents. In combination, all these factors and more have caused severe (and sometimes terminal) margin compression.

The list of retailers to go to the wall is long and includes the ASX-listed Clive Peeters, donut maker Krispy Kreme Australia, and a sad tale in Borders Books, amongst many others. Indeed, if electronics stalwart Dick Smith had been a standalone retailer (and not a part of Woolworths) I suspect it too would have felt the warm embrace of the receivers. Just this past week, the Jan Cameron (Kathmandu founder) backed Retail Adventures (think Crazy Clark’s, Go-Lo, Chickenfeed and Sam’s Warehouse stores) slid into administration.

But enough is enough. I now think it may finally be time to dip your toe into the retail pond.

And with analysts expecting interest rate cuts either side of the big man in the red suit coming down your chimney, consumer confidence could also get a well-deserved shot in the arm. Whilst I remain 50:50 on a rate cut come Cup Day next week, I would not be at all surprised to see interest rates 50 basis points lower over the next six months. At 2.75%, the Reserve Bank benchmark will be at all-time lows, and with the employment rate steady consumers will have little excuse not to share some of their Xmas cheer with long-suffering retailers.

So, where to start? Let’s look at some stocks I have written on over the last 12 months and how they may get a Xmas boost.

Super Retail Group (SUL:ASX). With retails chains including Supercheap Auto, Boating Camping Fishing (BCF), Rebel Sport and Amart All Sports, Super Retail is in a prime position to attract the Xmas retail dollar. Management recently updated the market on trading conditions in the first 16 weeks of FY13 and impressively defied the gloom surrounding the sector to post like-for-like sales growth across Auto ( 5.8%), Leisure ( 4.0%) and Sports ( 8.9%). With gifts for the whole family, Super Retail is unlikely to disappoint over the coming festive season. Since first noting SUL in April at $7.66, the stock has gone on to current levels around $9.

Automotive Holdings (AHE:ASX). Whilst you may rightly think AHE is not going to experience a burst of Xmas-related car sales, it is still set to benefit from the coming spending splurge nonetheless. Not only is AHE the largest ASX-listed auto retailer, it also has an impressive cold storage and logistics division. And thanks to canny acquisitions over the last 12-18 months, the cold storage arm of Automotive Holdings is better placed than ever to benefit from our collective Xmas lunch. Through both acquisitions and internal investment, Automotive Holdings is increasing its national pallet capacity from 42,000 in 2010 to an estimated 135,000 in 2014 to ensure, come December, our supermarkets are stocked with turkeys and all the trimmings. I first wrote about AHE in June when it was trading at $2.47, and it has since enjoyed a nice rally to current levels around $3.20.

Breville Group (BRG:ASX). This is another name that should enjoy some Xmas cheer, offering everything your kitchen could possibly need from toasters, to juicers, coffee machines and kettles. I have long been an admirer of the Breville business and continue to hold a core portfolio position in the name despite the stock price almost doubling from $3 to around $6 in the past 12 months. Breville’s impressive performance has largely been driven by its outstanding sales and profit growth in North America; FY12 sales grew 20% and profits grew a massive 76%. I will be looking for a confirmation of ongoing strength in the business at a trading update come the AGM in mid November but remain confident Xmas trading in Australia and North America should continue to deliver for Breville.

Rob Calnon is portfolio manager at OC Funds Management Limited.