ASX retailers have been under pressure lately.
Faced with persistently high inflation and the fastest interest rate hiking cycle in 40 years, consumers have struggled to find extra cash for discretionary spending.
Recent macroeconomic data suggests it might take a little while longer for the climate to improve. Despite inflation moderating and the Reserve Bank of Australia delivering its first rate cut last month, questions remain about the size and frequency of future rate cuts.
Many Australian retailers may continue to face pressure.
In this climate, 2 quality ASX retailers offer investors compelling investment opportunities. They also come with an attractive dividend yield.
This is especially enticing if you are looking to boost passive income. Alternatively, to overcome portfolio concentration (i.e. in banks or miners), you might want to consider adding one of these retailers to improve diversification.
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JB Hi-Fi Ltd (ASX: JBH)
JB Hi-Fi is arguably one of the highest-quality companies on the ASX.
JB Hi-Fi is Australia's leading electronics provider. It has an omnichannel presence, operating more than 320 stores across Australia and New Zealand and online. Its competitive advantage comes from its low-cost operating model focused on minimising expenditure.
JB Hi-Fi's track record speaks for itself, with its share price up 280% over the past 5 years.
Key to the success of JB Hi-Fi's business model is that products become obsolete due to technological advances, creating demand for new purchases. The replacement cycle of technology is typically around 5 to 7 years. This means those who upgraded their devices during the COVID-19 pandemic will be due for upgrades in the next couple of years. This is likely to benefit JB Hi-Fi, which has a dominant position in the electronics market.
Last year, JB Hi-Fi also acquired a 75% stake in E&S Trading Co, a retailer specialising in bathroom, kitchen, and laundry products. This provides JB Hi-Fi direct exposure to the housing cycle, which could diversify its revenue stream and improve growth.
With JB Hi-Fi's share price down around 10% from its peak, this could be a good buying opportunity for investors. It also offers a fully franked dividend yield of 3.0%.
Lovisa Holdings Ltd (ASX: LOV)
Another high-quality ASX retailer is Lovisa.
Lovisa is a fast-fashion jewellery retailer, which describes low-priced but stylish accessories that move quickly from design to retail based on the latest trends. Like JB Hi-Fi, it is an omnichannel retailer.
In contrast to JB Hi-Fi, Lovisa has a strong and growing international presence. This provides strong revenue diversification in the event of a downturn in the Australian economy.
During the last half, Lovisa opened 43 net new stores (57 openings and 14 closures), taking its global store count to 943 stores across 49 markets. This included the opening of its first franchise stores in Ivory Coast, Republic of Congo, and Panama. Since then, a further 13 net new stores have been opened. Management anticipates more than 99 stores opening in FY25, representing an acceleration from FY24. This would take its international store count above 1,000.
Historically, its business model has been resilient. It is not reliant on a specific fashion trend or particularly sensitive to economic conditions. Its target demographic of younger customers, predominantly females aged 15 to 30, is also less likely to have significant debt and thus is less affected by rising interest rates. This makes Lovisa a particularly compelling investment in this climate.
Lovisa has a particularly high gross margin, sitting at around 80% for the past few years. During the most recent half, it lifted to 82.4%, driven by continued focus on pricing, promotion management, and supplier negotiations.
Lovisa's share price has climbed 440% over the past 5 years. With Lovisa's share price down more than 30% from its peak, this could be a good buying opportunity. It also offers a fully franked dividend yield of 2.9%.
