Smaller retailers discounted

In 1998 the share price performance of many of the smaller retailers was poor with most under-performing the ASX's Retail Index. This year though it's a different story. Since the beginning of the year most small retailers enjoyed share price rises and with discretionary spending up. Barring a rise in unemployment or interest rates in the near-term, the sector should remain strong for a while yet.

This should show up in stronger sales growth for the likes of Brazin, Freedom Furniture, Rebel Sport and Just Jeans, the companies we'll cover in this issue. Next issue we'll look at Gowings, Miller's Retail, Harris Scarfe and Strathfield Group.

Strong sales growth 'n things

Since our last look at Brazin in issue 28 (Long Term Buy - $3.85) and after a huge run earlier in the year, the share price has cooled a little. However, we're still optimistic about this lingerie and recorded music retailer and wholesaler of women's surfwear. Brett Blundy, a man in his mid-30s who built the company from a single store 13 years ago to over 300 stores today, holds 57% of the stock and with few signs of him cashing in just yet, we're confident that the company is in capable hands for the foreseeable future.

Blundy's growth strategy is to develop new retail ideas and he's got a good track record of doing it very well. The latest is Viva Lingerie, unveiled in April 1999, that targets the youth market for under-garments. It's a different audience to Brazin's existing lingerie business, Bras n' Things, and should compensate for the fact that this chain seems to be approaching maturity as far as new store openings are concerned.

We feel that the ability to establish and build new businesses should ably assist an already strong sales and profit growth record. Sales were up 38% for the half-year to 31 December 1998 and profits were up 45%, made possible by excellent financial management that allows expansion, almost entirely from operating cash flows. The lack of debt on the balance sheet is testament to these unusual skills with gearing at just 10%

We've been recommending Brazin for some time now and believe that while the stock is trading at these lower price levels (a prospective PER of around 14) it's once again a good time to take advantage of strong growth prospects, capable management and the buoyant retail environment. LONG TERM BUY.

Furnishing your portfolio

In the MarketLab section of the last issue you may have noticed that a couple of Freedom Furniture directors were buying shares in their company during May and June. This was during a period that saw the share price trending down after hitting an April high of $2.05.

The slide, which started shortly after the announcement of the acquisition of the Victorian premium furniture retailer, Guests, is hard to fathom, especially when you consider that on 10 May a profit rise of 16% for the half-year to March 1999 was reported and comparable store sales rose by 7.4%. Throw in an increased number of stores and it's not unlikely that Freedom record full-year sales in excess of 20% during FY99.

So why the negative sentiment? There may be some concern over Freedom's gearing- a little over 100% at 31 March 1999- but in terms of interest-cover, it's quite manageable. A possible slow-down in the housing market, which would mean less demand for new furniture, is another component.

However, Freedom is probably less vulnerable than most to a lower rate of growth as many of its customers are upmarket buyers with income less sensitive to the economic cycle. Furthermore, apart from the Guests acquisition, the company has been broadening its product offering through a new set of homewares stores and a rebuild of its New Zealand business. At a prospective PER of around 13 we feel the fundamentals are sound and have upgraded our recommendation from Hold to ACCUMULATE.

Rebel still a player?

We last reviewed Rebel Sport in issue 21 (Better Value Elsewhere - $0.80), just after a profit warning that followed a lower-than-expected festive season performance. Then on 28 May a 14% fall in profit for the year ended March 1999 was reported. Despite the fact that sales rose by 10% margins were poor, partly due to inventory problems in footwear lines.

So what's the source of the problem? It's a rare downturn, noticeable worldwide, in the market for sporting goods. After years' of hype from Nike and Reebok people seem to be realising that expensive shoes don't make them run faster after all. The company's response has been a tentative move away from their niche market, launching a new concept store named Glue that targets the 'youthwear' market.

How this venture performs is anyone's guess, but with the company suggesting the sporting goods market is finally on an upswing, there's a good chance that the worst is over. Is it therefore a good time to buy? Jumping aboard now would certainly be more risky and only aggressive investors should do so. For everyone else, we'd suggest waiting for the evidence of a turnaround before getting too excited. Existing shareholders continue to HOLD.

Casual look, business-like growth

The evidence of a turnaround at Just Jeans however, seems to be already there. Since our brief in issue 14 (Hold - $1.27), the company declared on 11 March an interim profit for the six months to 30 January 1999, an increase of 15% to $8.1m on the prior corresponding quarter. Same-store sales were up a creditable 6.2% too.

The jeans retailer is seeking to build profits by rolling-out more Jay Jay warehouse-style jeans stores to offset the maturity of its Just Jeans stores and women's apparel chain, Jacqui E in Australia. In New Zealand the roll-out of these stores is still some way from saturation so prospects there remain strong.

We feel that Just Jeans is a well-managed company that's been fighting a fair few disappointments. Not least of all, was the termination of negotiations with the well-respected UK chain of Marks & Spencer to establish the retailer in Australia. Some poor product selection decisions and a lower Australian dollar have also left their marks. However, the company is now well and truly on the recovery path and at these prices can comfortably be ACCUMULATED.

So, for subscribers looking for exposure to the smaller retailers, we'd recommend Brazin as the pick of the bunch with Freedom Furniture following. Just Jeans is still fighting poor sentiment but is looking up while we'd suggest steering clear of Rebel for the time being.