Retail sales are picking up: Here's one cheap stock I've got my eye on

Retail sales thrash analyst expectations

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published December 4, 2014 2:20 pm AEDT

Retail sales in October rose 0.4% over the previous month, well above the 0.1% predicted by economists.

That follows a rise of 1.3% in September 2014, although that was mainly driven by a massive jump in sales of Apple's latest iPhones. Sale of electronic goods jumped 9.4% in September.

Electric sales

Electrical and electronic goods sales had another good month in October, rising 1.6% and surprising the economists. That should bode well for the consumer electronics retailers Dick Smith Holdings Ltd (ASX: DSH) and JB Hi-Fi Limited (ASX: JBH), although the market's reaction is a bit odd. Dick Smith's shares were down 0.5%, while JB's shares were up 1.6% in late-lunch trading.

Home is where the heart is

As good as those sales figures were, it was beaten by sales in the hardware, building and garden supplies category, which rose 1.7%. Obviously all those people I see at my local Bunnings – owned by Wesfarmers Ltd (ASX: WES) – on a Saturday morning, aren't just there for the sausage sizzle. And perhaps that's a slight positive for Woolworths Limited's (ASX: WOW) much maligned Masters and Home Timber & Hardware stores.

Both electronics and hardware belong to the household goods retailing sector, which appears to be doing very well as the chart below shows.

Household goods sales Nov 2014 — Household goods sales

Source: ABS

But judging by results in the Cafes, restaurants and takeaway food services category, which fell 2.1% on a seasonally adjusted basis, it's clear many consumers are electing to stay at home, rather than eat out.

Beware the department stores

While sales for October in department stores rose 2% on a seasonally adjusted basis, the chart below clear shows the likes of David Jones and Myer Holdings Ltd (ASX: MYR) are struggling to remain relevant to Australian shoppers.

Source: ABS

With the Christmas shopping season upon us, retailers may well be in for a surplus of sales. With JB Hi-Fi currently trading on a trailing P/E ratio of 12.5x, and paying a fully franked dividend of 5.3%, which grosses up to 7.6%, it's my pick of the retailers set to benefit from a strong Christmas.

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