The ASX retail stock worth buying in this COVID-19 bear market

ASX retail stock have taken a bigger hit than the ASX 200 during the coronavirus pandemic, but there's one stock that is worth buying in the turmoil.

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Retailers have been among the biggest losers during this coronavirus-triggered bear market that shaved a third of the value from the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO).

Consumer-linked stocks suffered more with the likes of the Afterpay Ltd (ASX: APT) share price and Adairs Ltd (ASX: ADH) share price tumbling by more than 60% since the market peaked in February.

The sector is likely to remain under pressure for some time yet as job losses continue to mount as companies shutter to stem the spread of COVID-19.

Upgraded to buy

But if there's one consumer stock that's worth picking up in the depth of this crisis, I reckon it's Breville Group Ltd (ASX: BRG).

The kitchen appliance maker got upgraded to "outperform" by Credit Suisse even as the broker lowered its 12-month price target on the stock to $16.16 from $23.05 a share.

The lower valuation reflects the shorter-term revenue headwind from the COVID-19 pandemic, but even then, this represents around a 30% upside from its current share price.

Bad news priced in

The 40% crash in the Breville share price over the past month reflects the market's belief that a big profit downgrade is looming.

However, Breville hasn't joined the rush of companies to withdraw their earnings guidance in the face of the uncertain economic times.

This doesn't mean one won't be coming. After all, governments around the world are forcing shops to shutter and major US retailers that carry Breville products, such as Williams Sonoma and Sur La Table, have temporarily shut stores in North America.

Don't be surprised if Australia follows Europe's lead to mandate the closures of all non-essential retail shops and even malls.

Well positioned for the downturn

Credit Suisse thinks June has become an important sell-in period for Breville, but that's assuming governments can regain control on the outbreak and relax some of the rules in the coming weeks.   

On the other hand, Breville can pull a few levers to protect profitability.

"BRG should have some ability to manage its inventory position and cost base over the coming months," said Credit Suisse.

"We estimate that a 50% reduction in marketing and R&D expenditure in 2H20 for example could offset a circa 15% gross margin impact."

Glimmer of hope

It's also interesting to see that JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) have reported same store sales growth recently. Both retailers carry Breville products.

One issue that may put off investors is Breville's $169 million debt. In normal times, this won't be much of a concern but the coronavirus crisis is impacting on the ability of companies around the world to roll-over their loans.

"Whilst our ability to assess borrowing headroom is somewhat limited by disclosure of total debt facilities (BRG also has access to seasonal debt facilities under its primary debt facility), we estimate that Net Debt/EBITDA could be maintained below 2.5x under a scenario where forecast gross profit is impacted by 15% in 2H20 and 10% in 2H21," said the broker.

Motley Fool contributor Brendon Lau owns shares of Breville Group Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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