The outlook for retail is challenging with the inflation genie out of the bottle, but there are two S&P/ASX 200 Index (ASX: XJO) retail shares that could buck the trend, according to JP Morgan.
While rising costs are threatening to put a squeeze on margins in the sector, the broker believes the JB Hi-Fi Limited (ASX: JBH) share price and Premier Investments Limited (ASX: PMV) are the ones to buy in this environment, reported the Australian Financial Review.
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Never mind that households are being forced to spend more on daily essentials like fuel and groceries. This should not be enough to stop JB Hi-Fi and Premier Investments from growing their profit margins, noted JP Morgan.
The broker's head of consumer research, Bryan Raymond, has two key reasons to be bullish on JB Hi-Fi.
The electronics and whitegoods retailer is well placed to keep benefitting from the ongoing work-from-home demographic shift.
JB Hi-Fi boosted by replacement cycle
"I think most people are still investing in their home offices to some degree," Raymond told the AFR. "JB is well positioned to continue benefiting from that replacement cycle."
This should drive demand for IT equipment like laptops and monitors. This is especially so given the life cycle of such equipment is about two years.
What's more, JB Hi-Fi is successfully embracing the online shopping revolution without sacrificing profitability.
Growing margins despite inflation
Even with COVID-19 supply chain disruptions, the retailer increased its Australian sales by 4.3% overall.
"The business EBIT margin in the three years leading up to COVID was circa 3 per cent to 4 per cent," Raymond said.
"We think that same margin should be circa 6 per cent over the next three years, on a post-COVID normalised basis. That is not due to housing cycle, that is due to the improved quality of that business."
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Meanwhile, apparel and stationery retailer Premier Investments is another that he thinks can expand margins. Like JB Hi-Fi, Premier Investments has successfully executed its online strategy.
"The economics of Premier's online business are superior to most other businesses in Australia, thanks to the structure of the P&L, which has a relatively high gross margin between 60 and 65 per cent and a relatively low-cost centralised distribution model," Raymond added.
Another key advantage that Premier Investments has is that its key brands face little competition. This is particularly so for Smiggle and Peter Alexander. Less competition means less discounting.
The latter brand is also benefitting from the work-from-home thematic, with more people lounging around in their pyjamas. This is the new work attire for the modern post-COVID world.
