Best in breed:
In the tough world of discretionary retailing, there’s a company that stands out
Each new year brings the opportunity to re-set and to do something different. So this year in Money I’ll be combing every sector of the ASX (and doing a little arbitrary readjustment to highlight some key sectors and opportunities) to bring you my best idea from each. To be clear, I don’t think you necessarily need to have “one of everything” but it’s a good opportunity to explore how each sector works, the risks and opportunities, and the companies that look best among their peers.
We’re kicking the year off with discretionary retail. As the name implies, these are mass-market businesses that rely on convincing us to part with our hardearned cash for something we can live without. It differs from “consumer staples” like Woolworths (ASX: WOW) and
Coles (COL) – while we all need to buy groceries (unless you survive on Subway or have a live-in chef), we don’t need those new jeans, that new computer or yet another pair of shoes.
As a result, one of the key determinants of success in the discretionary retail market is a company’s ability to create desire. That can be done by stocking a desirable brand, delivering a great in-store experience, or maybe by offering big discounts. In each case, they’re trying to win over someone who didn’t wake up planning to buy from them.
And the companies cover the retail waterfront. Everything from the old department stores like Myer (ASX: MYR) and DJs through to the likes of Target and Big W. Add in the specialty fashion stores, footwear retailers, car yards, and even cafes and restaurants, and you can see how broad this sector is.
For most of them too, fashion (and fad) plays a role in demand creation. Just because you’re relevant today doesn’t mean you’ll be the place to shop tomorrow – it’s why we see such a high turnover in retail, even among some of the better-known brands that used to be shopping centre stalwarts but are no longer around.
And it’s a tough gig. There are very low barriers to entry by competitors, which means lots of competition. Discretionary retail is a simple business but it’s very hard to do well when you have such strong and ever-present competition directly across the street or mall.
My runner-up in discretionary retail is Kogan.com (KGN), which is attracting ever more shoppers and offering new categories – from televisions to pet insurance and more – in the process. If Kogan can continue to compete effectively against its online rivals, by attracting more shoppers and convincing them to buy more products from more categories, today’s price is cheap.
But the winner is Premier Investments (PMV). Hiding behind the nondescript name are the retail powerhouses of “tween” stationery retail brand Smiggle and pyjama purveyor Peter Alexander, among others. These are two brands with strong performance and long growth runways, particularly overseas, and run by two experienced executives in chairman Solomon Lew and CEO Mark McInnes.
Being in the fashion/fad game leaves Premier perennially exposed to the risk that consumers decide its stores are old hat but it has the suite of brands, the balance sheet and the people to change with the times.
Scott Phillips is The Motley Fool’s chief investment officer. You can reach him on Twitter @TMFScottP and via email ScottTheFool@gmail.com. This article contains general investment advice only (under AFSL 400691).