The great disleveraging is continuing to the point where it is almost a deleveraging. I must ask H&H about the semantic distinction. So, OK, we all know that retail is struggling. But at what point is it fairly priced? A Morningstar report notes what is well known, at least for MB readers, that the savings rate is currently 10.5% net of depreciation. Assuming that housing prices consolidate and home affordability improves through wages growth — brave assumptions — household debt as a proportion of disposable income may decline to about 100-120%. This would take about three to five years. Half a decade, in other words.
Then there is the effect of the internet, which is probably mainly affecting the discretionary end:
Normally lower prices for imported goods would be favorable for bricks and mortar retailers such as Harvey Norman and to a lesser extent Myer and David Jones, but the discovery by consumers of a lower cost means of acquiring imported goods via the internet turns a retailing opportunity into an obstacle for these established retailers.
The result is the conventional recommendation:
Few investors need to be told Australia’s strongest bricks and mortar businesses are the supermarket giants, Woolwotrhs and Coles. Both WOW and WES also own discount stores, which are significantly lower quality businesses than supermarkets but constitute a relatively small proportion of total group earnings.
Both stocks carry positive recommendations at current prices, and we draw attention to attractive fully franked dividend yields of around 5% from WOW and 6% from WES at the time of writing. In terms of business quality our preferred bricks and mortar specialty retailers are Super Retail Group (SUL), Premier Investments (PMV) and JB Hi-Fi (JBH). Of these PMV and JBH have positive recommendations. The business models of leisure equipment retailer Kathmandu (KMD), Harvey Norman (HVN) and travel agent Flight Centre (FLT) potentially are under greater threat resulting in greater valuation uncertainty and so greater investment risk.
So, as usual Woolworths and Wesfarmers will get investment simply because of their size; the institutions have to hold them. So those franked dividend yields, not much different from bank deposits, are probably pretty safe unless the economy tanks, given that the share prices will be underpinned by some demand. Conventional pricing, in other words. But don’t expect any exciting capital growth. Probably right.
There are always limited options to invest in Australian retailers. Add a conservative consumer and the options become frustratingly narrow.