The retail industry is an extremely tough industry to operate in. You only have to look at Dick Smith to see how quickly things can turn sour. Changes in consumer habits can be swift, and retailers which fail to move with the times can be left behind.
Right now I believe there is one retail share that investors should look at buying, and one retail share I feel investors would be best avoiding. The share I feel investors should look at buying today is electronics and homewares retailer Harvey Norman Holdings Limited (ASX: HVN).
In its half-year results, Harvey Norman reported a whopping 31% increase in net profit to $185.5 million, or 16.7 cents per share in profit. The weaker Australian dollar certainly helped the company's international segment, which saw sales grow to $3.3 billion.
But the company also benefitted from the booming housing market. As Australian construction continues to grow, all the new dwellings need furnishings. In my opinion Harvey Norman, with its strong retail presence, is positioned as well as anyone to benefit from these positive macroeconomic trends. The potential growth supports the reasonably high price-to-earnings ratio of 18.3, which the shares trade at currently.
The retail share I feel investors should look at avoiding is Myer Holdings Ltd (ASX: MYR). Of all the areas of retail out there, the one which appears to be struggling most is the department store. Myer, much like international department stores such as Macy's, Nordstrom, and Debenhams, has struggled with the rise of online shopping.
Each year since 2010, earnings per share have dropped and Myer has lost nearly three quarters of its value since its IPO. In fact, the only thing that has grown during that time is its long-term debt. At the end of its last financial year it had increased to $441 million.
Management are working on a whopping $600 million turnaround plan, and in a little over a couple of weeks we will find out how things are progressing when it reports its half-year results. If a turnaround is successful then the shares do have room for a significant amount of growth.
But for now, I feel that an investment in Myer is best avoided until there is concrete proof that its turnaround plan is working.
Foolish takeaway
I believe Harvey Norman, together with Nick Scali Limited (ASX: NCK), Fantastic Holdings Limited (ASX: FAN), and JB Hi-Fi Limited (ASX: JBH), should continue to reap the rewards of growing construction in Australia for a number of years. For this reason, I feel Harvey Norman has the makings of a great long-term investment. Myer, on the other hand, has a somewhat unpredictable few years ahead of it, which is why I would avoid it at present.
