The outlook for the retail industry is rather mixed at the present time. On the one hand, the economy has endured a challenging period, with a number of investors being uncertain regarding the strength of economic data and the impact of a slowing resources sector on the wider economy.
However, on the other hand recent data has suggested that the RBA's dovish stance on monetary policy is beginning to have a positive impact. For example, unemployment figures were better than expected, GDP growth beat expectations and consumer confidence posted a sharp rise last month.
Whether this is a temporary phenomenon or not, the valuations of a number of retail-focused stocks indicate favourable risk/reward ratios. For example, Coles owner Wesfarmers Ltd (ASX: WES) trades on a price to sales (P/S) ratio of just 0.68, which is lower than the ASX's P/S ratio of 1.34 and also lower than the wider retail sector's P/S ratio of 0.73.
This appears to be an opportunity for long term investors, since Wesfarmers is still expected to grow its bottom line by 0.4% in the current financial year, and then by a further 7.9% in financial year 2017. Furthermore, Wesfarmers is not a pure play retailer, with it having a conglomerate structure which affords it exposure to a wide range of industries including chemicals and energy services. As a result, its earnings profile is much more stable than for many retail companies, thereby offering a less volatile shareholder experience.
In addition, Wesfarmers recently posted upbeat quarterly sales figures and, while pricing pressures are likely to remain in the short run, Wesfarmers' dividends are covered 1.1x by profit. With Wesfarmers yielding a fully franked 5.4%, it remains a relatively appealing income play while the ASX yields 4.8%.
Similarly, shopping centre operator Scentre Group Ltd (ASX: SCG) also trades on an appealing valuation, with it having a price to earnings growth (PEG) ratio of only 0.2. Part of the reason for this strong growth outlook is a portfolio which was 99.5% leased as at the end of the third quarter, with specialty sales growth of 5.4% in the quarter being aided by particularly strong performance from the clothing, jewellery and appliances spaces.
Looking ahead, Scentre Group is focused on curating the right retailers for its centres as it seeks to implement a development pipeline in excess of $3bn, with $830m of development projects being commenced in 2015. And, with re-leasing spreads being down 2.5% for the first nine months of the current financial year versus a fall of 4.2% in the comparable period from last year, Scentre Group appears to be moving in the right direction.
With its shares also offering a yield of 5.1% and a dividend growth forecast of 2.4% per annum during the next two years, Scentre Group has the potential to continue its share price rise of 15% year-to-date – especially if interest rates remain low and income stocks continue to be en vogue among investors.
