Right now the Australian retail sector is facing a perfect storm of bad news. Heading into the July-August reporting season, Australia's retailers have had to combat low consumer confidence and spending as a result of not only the negative budget commentary but also a delayed start to wintery weather.
The prolonged warmer weather has delayed winter sales and the most recent retail data from May pointed to a 0.5% fall in overall retail sales. This is bad news and so far clothing retailers appear the worst hit, as evidenced by the string of downgrades from some the sector's better names.
Could now be the time to dive into the best Australian retail groups?
Counter-cyclical investing, or investing in companies when no one likes them, can often be a great way to make huge gains if investors can time the market. Unfortunately timing the exact moment when sentiment changes is difficult (just look at the IT sector which was supposed to turn around 18 months ago).
A better strategy is to acknowledge that right now the retail sector is struggling, but it's inevitable that at some stage consumers will start to spend again. Picking the best, and most resilient companies in the field then becomes more important; as they are best placed to ride the wave of negativity most unscathed.
The Best Ideas
Following that principal, I believe the best three stocks in the retail sector right now are JB Hi-Fi Limited (ASX: JBH), Kathmandu Holdings Ltd (ASX: KMD), and Breville Group Ltd (ASX: BRG).
JB Hi-Fi is the domestic leader when it comes to electronics and gaming hardware sales. The group's extensive store footprint and reputation for low prices has seen it flourish despite the threat from online competition. It has been sold down in 2014 and looks cheap for long-term investors.
Kathmandu is great because its products are in demand from fashion conscious outdoor-types and are only available through the company's stores. This provides a level of protection again price deflation, however the company recently announced a profit downgrade as a result of the warmer start to winter. This one-off factor may be a great long-term buying opportunity.
Finally, Breville is set to benefit from the increase in new house starts and the May retail data actually indicated that housing goods were one of the few strong categories. Breville group is down 20% from its 2014 high and looks the goods for long-term investors.
