While the outlook for the retail sector may be uncertain on the one hand, now could be a great time to increase your exposure to it. Of course, a challenging period for the Aussie economy may last for some time, with commodity prices remaining weak and the Chinese economy continuing to experience a soft landing. However, with interest rates having already been cut and the full effect yet to be felt as a result of a time lag, the performance of retailers could surprise on the upside.
Furthermore, with the RBA seemingly willing to adopt an even looser monetary policy, consumer spending could gain a boost, with the cost of borrowing to spend likely to remain relatively low. As such, retailers such as Super Retail Group Ltd (ASX: SUL), which sells a diversified range of products through its three main divisions: auto, sports and leisure, is forecast to increase its bottom line at an annualised rate of 8% during the next two years. And, with it posting a rise in its bottom line of 15% during the last ten years, it has an excellent track record of delivering impressive improvements in profitability.
Despite this, Super Retail currently trades on a price to sales (P/S) ratio of just 0.88, which is considerably lower than the ASX's P/S ratio of 1.5. Furthermore, it also offers an excellent yield of 3.9% and, with dividends being covered 1.6x by profit, they appear to be sustainable in case there is a major downturn in the macroeconomic outlook.
Meanwhile, a lower interest rate is also good news for shopping centre operator, Scentre Group Ltd (ASX:SCG). It offers investors the opportunity to access growth at a reasonable price, with it having a price to earnings growth (PEG) ratio of just 0.27, which is considerably lower than the ASX's PEG ratio of 1.32. Furthermore, Scentre Group has a beta of 1.45, which means that its shares could further benefit from a falling interest rate.
That's because if, for example, the ASX is positively catalysed by a falling interest rate then Scentre Group's beta means that its shares should rise by 1.45% for every 1% increase in the price level of the ASX. Additionally, with a yield of 5.3%, it continues to easily hold more income appeal than the ASX, which has a yield of 4.5%.
Of course, not all retailers are enduring such a positive period, with Woolworths Limited (ASX:WOW) in the midst of a management refresh and in need of a clear and coherent strategy as to how it will overcome no-frills, discount retailers such as Aldi and Costco. As such, in the meantime, things could get worse before they get better.
However, with Woolworths' share price having slumped by over 20% in the last year, it appears to offer excellent value for money. For example, it trades on a price to earnings (P/E) ratio of 14.5, which is considerably lower than the ASX's P/E ratio of 16.1 as well as the food and staples retailing sector's P/E ratio of 16.9.
In addition, Woolworths has a fully franked yield of 4.9% and, with dividends being covered 1.4 times by profit and having risen by 11.6% per annum during the last ten years, Woolworths remains a top notch income stock. Certainly, it may take time to come good, but could be a strong long term performer.
