UBS picks the best ASX retail stocks for the post COVID-19 world

Consumer stocks have fared better during the COVID-19 crisis than many feared. But some ASX retail stocks are better placed in the post-coronavirus world.

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Consumer stocks have fared better during the COVID-19 crisis than many feared. But some ASX retail stocks are better placed in the post-coronavirus world.

The ASX retailers that have performed better than expected are those that have capitalised on changes to consumer behaviour during the shutdown.

These include those that can readily ramp up their online presence and sells products that are in demand from stay-at-home consumers.

ASX retail winners and losers

UBS points to another important trend. The increasing importance of customer data, which the broker believes will become the most important currency.

Mind you, not all retail companies have been able to ride these trends and the gap between the haves and have-nots are only set to widen.

"The gap between winners and losers looks set to expand over the next 3+ years," said UBS.

"What is less clear is how P&Ls [profit and loss] will change for those that capitalise on accelerated structural change."

3 things to watch for

The broker identified three potential changes to the P&Ls of retailers going forward. The first is the levers for sales growth, which can come from market share gains, utilising data to get shoppers to buy and expansion into new verticals.

The second is margin. There is an opportunity for the better retailers to increase profitability through more targeted promotions, cost-fractionization and more profitable verticals.

Finally, is the ability to lift return on invested capital (ROIC). This is related to expanding profit margins, but also reflects a lower capex in the longer run with the increased move to online and a lower rental bill.

Retailers are actively renegotiating with shopping centre landlords to cut rents and/or reduce the number of shops.

As I wrote last month, mega malls are losing their strategic advantage as the growth of online sales accelerate.

Best retail stocks to buy now

Perhaps the more important question for ASX investors is which retail stocks are best placed to report improvements across all three areas?

While there are a number on the S&P/ASX 200 Index (Index:^AXJO) that fall into this category, including online retailer Kogan.com Ltd (ASX: KGN) and fast food chain Domino's Pizza Enterprises Ltd. (ASX: DMP), not all are trading on attractive valuations.

If you added this as an extra filter, three consumer-facing stocks stand out, according to UBS.

These are supermarket giant Woolworths Group Ltd (ASX: WOW), stationery and apparel group Premier Investments Limited (ASX: PMV) and KFC franchisee Collins Foods Ltd (ASX: CKF).

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd and Premier Investments Limited. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool Australia has recommended Collins Foods Limited and Domino's Pizza Enterprises Limited. 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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