Macro stimulus from tax rebates and interest rate cuts has to date had limited flow-through benefit to discretionary retailers. Consumers are focusing more on the reasons behind the interest rate cuts and becoming increasingly cautious on their discretionary spending decisions.
With this challenging domestic backdrop, we continue to prefer retailers that offer growth through-the-cycle prospects by being leveraged to global expansion opportunities or to structural tailwinds (such as the shift to online).
Three stocks that fit this profile very well are CCX, LOV and TPW.
CITY CHIC COLLECTIVE (CCX)
CCX is a global multichannel retailer specialising in plus-size (size 14+) women’s apparel, accessories and footwear. It is a collective of customer-led brands including City Chic, Avenue and Hips & Curves. City Chic appeals to fashion-forward women and its multichannel model comprises: a network of >100 stores across Australia/New Zealand; multiple websites operating in Australasia and USA; marketplace and wholesale partnerships with major US retailers such as Macy’s and Nordstrom; and a wholesale business with European partners such as ASOS and Zalando. Avenue targets value-conscious women and Hips & Curves is an intimates brand; both are online only with a significant customer following throughout the USA. Led by a strong management team with a proven track record and backed by a strong balance sheet, we believe CCX is well positioned to grow globally. The key growth opportunity is the significant USA market where we believe the City Chic brand is building strong traction. Also, we believe the recent acquisition of Avenue’s e-commerce assets is attractive on a number of fronts including: being highly EPS accretive; provides immediate leading exposure to the US value segment; materially accelerates US customer acquisition, with cross-selling potential; and includes opportunity to realise synergies in buying disciplines and the supply chain.
LOVISA HOLDINGS (LOV)
LOV is a leading specialist fast fashion jewellery retailer that is strategically focused on the affordable jewellery segment. Australia is LOV’s largest market exposure, however the company is embarking on an international store rollout strategy. Our positive view on LOV is supported by the company’s strong long-term earnings growth outlook underpinned by significant global store rollout opportunities. LOV has entered a number of major new territories in the northern hemisphere including the USA, the UK and France (plus Spain in pilot). Among these, the USA is the ‘big prize’ where we believe store rollout is progressing strongly. We believe LOV is well placed to execute on its international growth plans given a number of attractive business attributes. These include LOV’s vertical business model that supports high gross margins and brand control, compelling store metrics with high sales intensity and short average payback period, fast supply chain (only 8-10 weeks from product development to being in-store), and a regionally adaptable product range. We also believe LOV has defensive attributes as customers are able to treat themselves without putting pressure on their budgets (given LOV’s low dollar value transactions).
TEMPLE & WEBSTER (TPW)
TPW is Australia’s largest online only furniture and homewares retailer with circa 150,000 products on sale from roughly 700 suppliers. The business runs an innovative drop-shipping model, where products are sent directly to customers by suppliers, enabling a larger product range, faster delivery times and reducing the need to hold inventory. The drop ship range is complemented by a private label range which is sourced directly by TPW from overseas suppliers. We believe TPW is well positioned to benefit from a number of structural trends, including: the migration to online (only 4-5% of Australia’s furniture and homewares sales is online, vs 14% in the US and UK); online savvy millennials now entering TPW’s core demographic; and faster internet/mobile speeds. With a stabilised platform and strong balance sheet in place (net cash of $13.5m at 30 June 2019), management is able to focus more on driving top-line growth. There are several initiatives underway to drive sales growth including: adding depth and breadth to the company’s core offer; continuing to invest in the trade and commercial segment; adding new adjacent categories; and the launch of a mobile app.