With interest rates having moved lower during the course of 2015, the Aussie retail sector could gain a boost. Clearly, this will take time to come through, since a time lag of around nine months is commonplace after a change in interest rates, with there being a further delay before retailers begin to report any improvement in their sales numbers.
However, with the RBA apparently more dovish than hawkish at the present time, consumer spending could hold up a lot better than many investors currently believe – even though the outlook for the Aussie economy remains relatively uncertain.
That's a key reason why the valuations of a wide range of retailers have come under pressure during the last year. For example, conglomerate, Wesfarmers Ltd (ASX: WES), has seen its share price fall by 6% in the last 12 months, with fears surrounding a supermarket price war fuelling a decline in investor sentiment.
However, Wesfarmers is more than just a supermarket; it is well diversified, with it having a home improvements chain, office supplies business, as well as an automotive service business. As such, the increasing popularity of no-frills supermarkets such as Aldi and Costco may have a negative impact on part of its business and cause margins to come under pressure, but Wesfarmers is still expected to post a rise in earnings of 6.4% per annum during the next two financial years.
Furthermore, Wesfarmers still offers excellent value for money, with it having a price to book (P/B) ratio of just 1.83. For a business that offers the stability and resilience of Wesfarmers, that seems like a very fair price to pay – especially with the future of the Aussie economy and the ASX being relatively uncertain. As such, Wesfarmers' ultra-low beta of 0.64 should appeal to investors if the performance of the ASX becomes relatively volatile.
Meanwhile, home entertainment retailer, JB Hi-Fi Limited (ASX: JBH), also offers excellent value for money at the present time. It trades on a price to sales (P/S) ratio of just 0.59, which is considerably lower than the ASX's P/S ratio of 1.48 and is also enticing while the wider retail sector has a P/S ratio of 0.84. Furthermore, JB Hi-Fi is forecast to increase its bottom line at an annualised rate of 5.6% during the next two years and, with its earnings having increased by 22.9% per annum during the last 10 years, it has an excellent track record of growth.
In addition, a lower interest rate means that JB Hi-Fi could become an even more appealing income play. That's partly because it currently offers an attractive (and fully franked) yield of 4.2%, but also because it has a rather modest payout ratio which has scope to rise. In fact, JB Hi-Fi currently pays out just 68% of profit as a dividend, which is relatively low compared to other retailers. As such, its dividends could rise at a brisk pace and provide its investors with an excellent income return, as well as capital gains, over the medium term.
