What’s in store for Myer and David Jones in 2014?

What's in store for Myer and David Jones in 2014?

Online retail remains key, external factors will also dominate.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published January 2, 2014 6:14 am AEDT

2013 was a terrific year for investors in Australia's listed retailers. While difficult operating conditions resulted in many companies delivering earnings below previous years, investors pushed share prices higher in anticipation of improving market conditions.

Five of Australia's major retailers managed to handsomely beat the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) despite battling constant headwinds of lacklustre consumer sentiment, the high Australian dollar and sustained pressure from online retail.

The main industry players all returned above 15% of the benchmark ASX 200 index:

Myer (ASX: MYR) returned 28% and yields 6.5%.
David Jones (ASX: DJS) returned 25% and yields 5.6%.
Harvey Norman (ASX: HVN) returned 64% and yields 3%.
JB Hi-Fi (ASX: JBH) returned 108% and yields 3.5%.
Super Retail (ASX: SUL) returned 35% and yields 3%.

Tailwinds for the retail sector in 2014 include a lower Australian dollar reducing the appeal of overseas online shopping, improved consumer confidence and spending following a strong year of asset value growth, and increased housing construction hopefully supported by incentives to builders or first home owners. Additionally, if the sector can stabilise earnings, investors searching for yield will be attracted to the solid dividends on offer.

Myer and Harvey Norman are looking strongest

In this Foolish investor's opinion, Myer and Harvey Norman represent the best companies in the sector. They have two of the better online stores and Myer, unlike some of its rivals, operates online fulfillment centres (warehouses) that exist solely to quickly distribute the company's 15,000 best selling online items. This eliminates double handling by local stores and improves the overall efficiency of the company. As a result, Myer's online sales are due to hit $50 million and become profitable in 2014.

Myer and Harvey Norman are also run by two of the biggest, and most successful, names in the industry. Bernie Brookes and Gerry Harvey are industry veterans, and although both have admitted to being slow to transition to an online platform, they remain perfect choices to lead their respective companies going forward.

Foolish takeaway

Retail stocks had a great 2013 in anticipation of improved market conditions, while the businesses themselves continued to struggle with lower sales and margins. The fate of the sector in 2014 will likely be decided by the level of the Australian dollar, the government decision to lower the GST threshold on overseas purchases, and the expected recovery in consumer sentiment. Early indications are that holiday sales have been successful, setting the platform for a strong 2014 and beyond.

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