The retail sector is hardly a popular place in which to invest at the present time.
As Woolworths Limited's (ASX: WOW) recent quarterly update showed, the Aussie retail sector is a tough place to do business and, with a downgrade to profit and sales failing to meet expectations, its shares dropped by almost 10% following the results.
Clearly, things could get worse before they get better for Woolworths and its retail peers. The Australian economy is enduring a period where it is flirting with recession and, with there being little scope for a dramatic rise in commodity prices to boost the resource-focused economy, negative growth could be on the agenda in 2016.
This is a key reason why shoppers are trading down on their food and other items, which partly explains why Woolworths posted a same-store drop in food and liquor sales of 1% in the first quarter.
Looking ahead, Woolworths has warned that its profitability in the first half of the year may be hit by as much as 35% as shoppers increasingly make price their main focus when buying staple items. As a result, no-frills, discount operators such as Aldi and Costco are continuing to win market share, leaving Woolworths to be drawn into a price war so as to limit the fall in sales which it is currently experiencing.
Woolworths, of course, is undergoing major changes. It has yet to find a new CEO – who is likely to refresh the company's strategy. He (or She) will inherit a business which is experiencing tough trading conditions, but still has enviable locations as well as the potential for a more efficient supply chain, which could help it to overcome its present difficulties.
For investors in the company, its shares offer a relatively wide margin of safety and appear to take into account the difficult outlook which it faces. For example, they have a price to sales (P/S) ratio of only 0.5, which is far lower than the wider retail sector's P/S ratio of 0.8. As such, and while further share price falls are possible following the 20% fall year-to-date, now could be a good time to buy Woolworths for the long term.
Similarly, buying a slice of Super Retail Group Ltd (ASX: SUL) also makes sense, with the auto, sports and leisure company undergoing significant restructuring in light of it missing profit expectations in its most recent financial year.
For example, Super Retail has closed its Fishing Camping and Outdoor chain in New Zealand and has also restructured and repositioned the Ray's Outdoors business. This includes store refurbishments, with the first three stores in the new format now open, and forms part of Super Retail's aim to engage and inspire its customers to a greater degree. This includes new multi-channel platforms, new loyalty programs, as well as supply chain and inventory management.
Like Woolworths, Super Retail offers a relatively wide margin of safety. Despite its shares delivering a total shareholder return of 775% since their IPO in 2004, they still trade on a P/S ratio of just 0.86 which, given that net profit is due to rise at an annualised rate of 14.1% during the next two years, is highly appealing.
