Last week has been quite tough for the Australian retail sector as the stocks lost ground at the back of gloomy outlook driven by the latest weak retail sales data. In addition, the deteriorating sectoral sentiment costed many players with the release of the news that the high-profile fashion retailer, Topshop Australia, entered a voluntary administration while there was some sector rally on Wall Street towards the end of the week. Amidst these conditions, it will be interesting to look at four retail sector stocks that seem to bear the brunt of the situation at large. 

Super Retail Group Ltd

SUL Details
 
Decent performance in first 17 weeks of H2FY17: Super Retail Group Ltd.’s (ASX: SUL) stock witnessed some upward movement (1.4%) on May 26, 2017 post declining by about 30% in last three months owing to sector driven sentiments and increasing apprehensions from Amazon’s entry into Australia. The group had reported for a decent trading update with the Auto retailing division posting a like for like sales growth of 2.5% in the first 17 weeks of H2 FY17 with a 3.0% growth on YTD (Year to date) basis (as at April 2017).  Sports Retailing sales grew by 1.5% in the first 17 weeks of H2FY17, and 4.5% on a YTD basis. Further, Leisure Division continued to deliver like for like sales growth of ~7% despite adverse weather conditions and 6.0% on a YTD basis during the same period. While lower traffic conversion at company’s shopping center stores impacted the sales to some extent, EBIT margins for all three divisions continued to be more than previous corresponding period.
 

Company’s five year financial targets (Source: Company reports)
 
The company has planned capital expenditure of ~$100m to support new stores, refurbishment programs, omni-retail development and general requirements while reiterating EBIT to be ~16% - 18% year on year (yoy) for FY17. Given the competitive business scenario,we maintain a “Hold” recommendation on the stock at the current price of $ 7.37
 

SUL Daily Chart (Source: Thomson Reuters)

JB Hi-Fi Ltd

JBH Details
 
The Good Guys to expand JB Hi-Fi’s presence in the home appliances market: JB Hi-Fi Ltd (ASX: JBH) witnessed a stock price rally of 3.3% on May 26, 2017 while the stock has slipped about 12% in last three months owing to the challenging scenario in the retail sector. For Q3FY17, the group posted a comparable sales growth of 8.2% while reporting total sales growth of 10.8% yoy. The acquired, The Good Guys business, reported a subdued comparable and total sales growth of 1.2% and 2.6%, respectively. Although the sales from the acquired business was not impressive, it is expected to significantly expand JB Hi-Fi’s capability in the attractive home appliances market through store roll-out and continued market share gains. By leveraging on complementing businesses with a wide range of products, brand position, and merchandising capability, JBH expects to generate synergies of $15-$20 million per year after a three-year integration period. Notably, JB Hi-Fi’s lowest cost of doing business (~15.2%) among major Australian listed and international consumer electronics retailers has enabled it to maintain low prices and compete effectively in the market. The company reiterated total sales of ~$5.58 billion (JB Hi-Fi sales of $4.33 billion and The Good Guys’ sales of $1.25 billion) with underlying profit of $200 - $206 million for FY17. However, looking at the trading conditions coupled with increasing competition and challenging environment,we believe the stock is “Expensive” at the current market price of $ 23.12


JBH Daily Chart (Source: Thomson Reuters) 

Metcash Ltd

MTS Details
 
Drag from lower earnings in food & grocery: During H1FY17, Metcash Ltd (ASX: MTS) reported a meager revenue growth of 0.3% yoy to $6.63 billion while posting a 4.2% decline in EBIT to $128.1 million, led by lower earnings in food & grocery division. Further, underlying profit after tax fell 4.7% to $82.8 million largely due to the decline in group EBIT. The company expects continuous positive momentum from liquor for the remaining FY17 while the earnings from the food & grocery business is expected to be more than H2FY16 despite significant headwinds. Further, H2FY17 is expected to benefit from an additional trading week, cost savings, as well as repositioning of the convenience business which is expected to generate a positive EBIT in 2HFY17. The group had generated strong operating cash flows of $130.6 million driven by continuous sale of non-core assets which further generated a $27.2 million in cash. The positive cash flows together with the $92.8 million of equity raised to fund the HTH acquisition, resulted in net debt reducing to $197.6 million. Notably, the acquisition of HTH, created a second largest hardware retailer in the market, with servicing a retail network of ~750 bannered stores and a further ~500 unbannered stores. Further, with the acquisition of HTH, revenue composition from trading division increased to ~60% from ~55%. The group seems to be on track to achieve net synergy benefits at upper end of $15m – $20m by end of FY18.
 

National footprint (Source: Company reports)
 
On the other hand, the stock fell about 6.5% in the last three months as on May 26, 2017, and subdued financials coupled with increasing industry headwinds are further expected to cap any potential upside. We give an “Expensive” recommendation on the stock at the current market price of $ 2.02


MTS Daily Chart (Source: Thomson Reuters) 

Harvey Norman Holdings Ltd

HVN Details
 
Deteriorating sectoral sentiment overweighing decent trading update: Harvey Norman Holdings Ltd (ASX: HVN) had reported a 5.5% yoy growth in total aggregate sales for the ten months ended April 30, 2017 for Australian Franchisees, while posting a 4.8% yoy growth in comparable aggregate sales during the same period. During ten months’ period ended April 30, 2017, two Harvey Norman and one Domayne branded franchised complexes were opened while one Harvey Norman branded franchised complex was closed. The stock otherwise declined by 28% over the last three months as on May 26, 2017 at the back of sector driven challenges. Further, the recent fall in retail sales data against the market’s expectation of a rise, impacted the stock. We give an “Expensive” recommendation at the current market price of $ 3.69
 

HVN Daily Chart (Source: Thomson Reuters)

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