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By
Reuters
Published
Feb 8, 2011
Reading time
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Time to jump into Australian retail shares?

By
Reuters
Published
Feb 8, 2011


Myer; Australia's largest department store chain
Feb 8 - Australian retail stocks have underperformed as store operators from top department store Myer to top grocer Woolworths to bargain store The Reject Shop lowered their profit forecasts on weak sales.

Some of the worst flooding on record has slashed sales of summer clothing, and a rise in the Australian dollar to 28-year highs has cut prices -- and profit margins -- on electrical goods. Shares in Australian retailers have fallen since a surprise interest rate hike in November to a two-year high of 4.75 percent. Cautious consumers reacted by spending less and saving more.

But with the market now only pricing one rate hike for 2011 late in the year and as a record trade surplus boosts incomes, is now the time to buy retailers such as Myer and electronics store JB Hi-Fi.

RATE HIKES WASHED AWAY?

Recently, rate expectations for Australia have changed dramatically. Financial markets have only fully priced one rise to 5.0 percent by year-end after disastrous floods in Australia's east.

"Looking out 12-18 months, clearly we will be seeing better times ahead for Australian consumers because the job market already is tight and likely to get tighter, and wages are likely to rise. Already we have wealth levels at a record high," said Craig James, senior economist at CommSec.

"We will see consumer spending start to pick up again. The fundamentals of the economy are still in pretty good shape which does suggest higher consumer and business spending down the track. And if the Reserve Bank can stay on the sidelines a little while longer, that's going to give people confidence to spend also," he said.

Since the November rate rise, the broader market has gained around 3.6 percent, while nearly all Australian retailers have lost ground, led by The Reject Shop with a 26 percent fall.

"For the consumer discretionary sector, you would have certainly a tilt to overweighting rather than underweighting, reflecting recent weakness," said James.

Woolworths shares have fallen 5.5 percent, Harvey Norman 11.7 percent and department stores Myer 14 percent since the rate rise. David Jones shares are down 5.6 percent and electronics retailer JB Hi-Fi is down 2 percent.

Price-to-earnings valuations start at around 11 for Harvey Norman, rising to 15 for JB Hi-Fi and Woolworths. Myer shares were trading around 12 times earnings before its profit warning.

"It all comes down to what the Reserve Bank does," said Simon Bonouvrie, portfolio manager at Platypus Asset Management, who reckons shares in select Australian retailers could rise 10-20 percent this year if "the Reserve Bank can demonstrate it is on hold."

Bonouvrie favoured Wesfarmers and David Jones, and pegged JB Hi-Fi as a good "contrarian" buy after the decline in its price-to-earnings ratio.

TOUGH GAME

Some fund managers were cautious about the outlook.

"Retailing's a tough game at the moment," said Simon Burge, portfolio manager at ATI Asset Management, which does not hold any key retailers such as Myer, David Jones, Harvey Norman and JB Hi-Fi.

"We don't see any of those stocks as particularly cheap. In retail land, there's still price deflation going on," he said.

Shares in Myer plunged 12 percent to a 7-month low on Monday after a shock fall in sales in January led it to lower its earnings outlook to a fall of as much as 5 percent this year.

Australian retail sales rose by a surprisingly modest 0.2 percent in December as consumers stayed cautious, while inflation-adjusted sales for the fourth quarter dipped 0.3 percent in a blow to economic growth.

"I don't necessarily think we've seen the worst of it," said Burge.

(Reporting by Miranda Maxwell; Editing by Ed Davies and Vinu Pilakkott)

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