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Battered Aussie Retailers Lure Contrarians as Amazon Looms

Updated on
  • Australian retail stocks index down 10 percent this year
  • Flight Centre, JB Hi-Fi, Harvey Norman picked by UBS

As earnings season starts in Australia, some investors and analysts sense opportunity in a handful of beaten-down retailers.

They’re not for the faint of heart. Stagnant wages and rising household debt are weighing on consumer spending. There’s an almost daily drumbeat of dread from local media and brokerages over the looming arrival of Amazon.com Inc. Even the central bank made a veiled reference to the sprawling online merchant.

An index of retail stocks is down 10 percent this year and bears are betting there’s more pain to come -- consumer-oriented companies are among the most heavily shorted stocks Down Under. On the flip side, even a hint of good news when retailers release profit reports could propel the stocks upward.

“There’s been a lot of market pessimism, so positive earnings will be rewarded,” said Nader Naeimi, head of dynamic markets at AMP Capital Investors Ltd. in Sydney. “The contrarian in me tells me if I were to buy one sector ahead of this earning season in Australia, I would be buying retail.”

Travel agent Flight Centre Travel Group Ltd. and retailers JB Hi-Fi Ltd. and Harvey Norman Holdings Ltd. make the cut, according to UBS Group AG strategist David Cassidy. The stocks are worth buying because they’re cheap and the companies are likely to post good results and forecasts, squeezing short sellers, he said.

Click here to read why Deutsche Bank suggests buying shorted stocks

Bears haven’t backed off Flight Centre even after it released an improved earnings outlook last month. Bets that the shares will fall now account for 29 percent of its free float, IHS Markit data show, making Flight Centre the most-shorted stock in Australia. It is set to report results Aug. 24.

Short interest in Harvey Norman, which has faced questions on its accounting, is at 23 percent while 13 percent of JB Hi-Fi’s free float has been lent out and sold. Harvey Norman has dropped 14 percent in 2017 and JB Hi-Fi, which bought the Good Guys chain earlier this year, is down 6 percent.

Harvey Norman is trading at 12.9 times forward earnings and JB Hi-Fi at 14.3 times, less than the S&P/ASX 200’s multiple of 16. The two companies are continuing to benefit from the demise of competitor Dick Smith Holdings Ltd., said Cassidy, who correctly forecast 2015’s slump in mining stocks.

Another positive for the stocks is a rebound in countrywide retail sales in April and May. That could help JB Hi-Fi surprise investors, said William O’Loughlin, an investment analyst at Rivkin Securities.

The company is expected to post a 28 percent increase in annual net income of A$194.2 million ($155 million) when releases results on Aug. 14.

Billionaire Solomon Lew’s Premier Investments Ltd., whose stock is down 4.8 percent this year, may also surprise, O’Loughlin said. The company is benefiting from its children’s stationery brand Smiggle, he added.

Continued Pressure

To be sure, the wider retail industry is still facing pressure.

“Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending,” the Reserve Bank of Australia said in its policy statement Tuesday. “Increased competition from new entrants in the retail industry” is also a concern.

On Thursday, Amazon announced plans to open its first Australian distribution center in Dandenong South, Melbourne. The warehouse is an “integral early step” in establishing a retail offering Down Under, the Internet company said in a statement.

As for sector-wide results this go-around, UBS’s Cassidy wasn’t bullish. “I wouldn’t say, in particular, on an across-the-board basis retail’s going to be that strong,” he said.

— With assistance by Emily Cadman

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