Overinvested in Wesfarmers shares? Here are two alternative ASX stocks with big growth potential

I'm a big fan of these 2 stocks for their income and growth potential.

| More on:
Two happy woman looking at a tablet.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

I regularly like to call Wesfarmers Ltd (ASX: WES) one of the best investments on the ASX. It's not surprising to me that the Wesfarmers share price has risen 71% over the past five years due to the strength of the ASX stock's underlying retail businesses of Bunnings and Kmart.

However, when a stock rises significantly, it can become a bigger part of someone's portfolio. That can be a good thing, but it would also be understandable for someone to want a bit more diversification if the portfolio becomes too focused on one business.

The retail sector could still be an appealing place to look for opportunities for a medium-term investment because when interest rates start coming down, it could lead to an increase in retail spending by Aussie households.

So, below are two of my favourite ASX retail stocks.

Universal Store Holdings Ltd (ASX: UNI)

This company says it owns a portfolio of premium youth fashion brands, which offer a carefully curated selection of on-trend apparel products to target 16 to 35-year-old fashion-focused customers. It has 102 physical stores across Australia.

Its businesses include Universal Store, CTC (trading as THRILLS and Worship) and Perfect Stranger.

The ASX retail stock has delivered an extraordinary performance considering the difficult trading environment amid high interest rates and elevated inflation.

In FY24, the company reported sales growth of 9.7% to $288.5 million, underlying profit (EBIT) growth of 16.6% to $47.1 million and statutory net profit growth of 45% to $34.3 million.

I thought this result was impressive in a number of ways, including the operating leverage the company demonstrated, where its margins increased, enabling profit to rise much faster than sales.

The trading update for FY25 was also very promising. Universal Store sales were up 15.3%, with like-for-like (LFL) sales growth of 12.5%, while Perfect Stranger sales were up 89.9%, with LFL growth of 24.2%. I think this level of growth bodes well for the future because its products are clearly resonating with customers.

In FY25, it's also working on improving its gross margin, introducing new brands, and reducing its cost of doing business.

Nick Scali Limited (ASX: NCK)

Nick Scali sells furniture through a number of brands, including Nick Scali, Plush, and Fabb Furniture in the UK (following the acquisition).

This ASX retail stock is looking to steadily add to its store networks, particularly with Plush stores in Australia and to grow its UK store network.

Pleasingly, in the first four months of FY25, ANZ written sales orders were 3% higher, with both August and September showing an increase year over year. It's planning to open two Nick Scali stores and between three to five Plush stores in FY25. Freight rates may be higher right now, but I think it will be a shorter-term issue. 

The UK currently has a challenging trading environment, but Nick Scali is already boosting margins there and it expects further improvement as more Nick Scali product is rolled out to stores. It's also looking to reduce costs in its UK business.

Nick Scali said it has moved to the same outsourced delivery model in the UK as ANZ which will "improve the efficiency and scalability of deliveries to customers." In the recent trading update, Nick Scali said regarding its UK operations:

Our strategy is to transform the business to the Nick Scali business model and leverage group capabilities for efficiency and scale before focusing on expansion of the UK showroom network. However, should an attractive new UK showroom location opportunity present, we will consider it.

I think the ASX retail stock has the room to significantly grow profit in the UK and ANZ over the next three to five years.

Should you invest $1,000 in Nick Scali Limited right now?

Before you buy Nick Scali Limited shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Nick Scali Limited wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 7 February 2025

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Nick Scali. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Retail Shares

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Retail Shares

I think this ASX 200 retailer could skyrocket in 2025

This business looks very compelling to me this year. Here’s why.

Read more »

A warehouse worker is standing next to a shelf and using a digital tablet.
Retail Shares

Up 6% already in 2025, what's next for Wesfarmers shares?

Let's see what's in store for the retail giant this year.

Read more »

Young couple at the counter of a hardware store.
Retail Shares

Why Wesfarmers shares just got a 10% upgrade from UBS

Can Wesfarmers shares put in another year of strong outperformance in 2025?

Read more »

A mature age woman with a groovy short haircut and glasses, sits at her computer, pen in hand thinking about information she is seeing on the screen.
Retail Shares

A compelling ASX 200 stock with 'multiple growth levers'

This business could be a premier opportunity according to an expert.

Read more »

A happy beautiful woman with curly brown hair and wearing bright red lipstick smiles representing the soaring Adore Beauty share price today
Retail Shares

ASX retail stock rallies on 94% earnings boost

There was a beautiful update from this retailer.

Read more »

Siblings laying upside down on a couch.
Retail Shares

Guess which under-the-radar ASX 300 stock this fundie is 'particularly excited about'

A leading fundie forecasts substantial growth potential for this ASX 300 dividend stock.

Read more »

A bemused woman tries to choose between two slices of cake she holds on two plates.
Retail Shares

Are Coles or Woolworths shares a better buy right now?

Which of these supermarkets is the right choice to go shopping for?

Read more »

A woman peers through a bunch of recycled clothes on hangers and looks amazed.
Retail Shares

Why I think this ASX small-cap stock is a bargain at $7.70

This small business has big potential, in my view.

Read more »