Skip to content

Are retail stocks a bargain now?

This article appeared in the January 2015 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

What the charts say about Woolworths, Wesfarmers, Harvey Norman and Myer. 

Photo of Richard Lie By Richard Lie, StockRadar

Australian retail is a tricky investment theme. The 2014 Christmas period is supposed to be the retailers' season, but the macro outlook is bleak and foreign competition in the sector is rising rapidly. On the micro level, every retailer is unique and should be taken on its own merits.

Below, we take a closer look at the four highest-profile retailers on ASX to get clues about future price direction.  (Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).


Woolworths line chart - from June 2001 to December 2014

Woolies had a great decade but there are some challenges ahead, such as pressured profit margins and therefore profitability. Its average margin is currently around 7.5 per cent, which is high by industry standards. (Coles has an average margin of 4.55 per cent and Aldi operates in Australia at around 3 per cent).

This has kept Woolies' tills full in recent years but it will be a tough number to maintain with increased foreign competition. In a recent report to clients, Merrill Lynch said Woolies was at risk of earnings downgrades if manufacturers were unable to cut prices any further. It also said the retailer's higher margin was not due to higher prices or supplier rebates, but cost control, "a competency it is highly regarded for".

Merrill Lynch warned that earnings were under threat from increased labour, electricity and rent costs, as well as a slowdown in productivity improvements, which the company was attempting to offset by squeezing suppliers for lower prices.

The market's message (price):

  1. The long-term chart shows that Woolworths has come a long way since 2000, rising around tenfold - one of the best investment stocks in a generation. That said: "past performance is no guarantee of future returns".
  2. Recent price action has been weak after stalling in June and failing to break out - a bearish sign.
  3. We could be in a new long-term trading range, between $24 and $38, for some time to come.
  4. Volume has been heavy on the downside, which shows the big hands (institutions) are selling.
  5. I am short-term bearish on Woolworths.


Wesfarmers line chart - from November 1999 to December 2014

Wesfarmers calls itself "a diversified business" but it isn't really. It's a retailer. The Coles supermarket business accounts for 42 per cent of the group's earnings, while the Bunnings, Officeworks, Kmart and Target stores together account for an additional 38 per cent. Any analysis on Wesfarmers needs to focus on Coles first.

Citi analyst Craig Woolford has been a vocal critic of the group since August 2012 and says it focuses on driving sales rather than margins, a dangerous strategy in light of price deflation and increased competition. He also points out that any turnaround in Coles' liquor operations will take another five years, and that this initiative is looking more difficult than its grocery operations, given its lack of scale and poor store locations.

Meanwhile, Target recently confessed it had been selling its apparel too cheaply and that its supply chain needed some urgent changes, after being caught in a price war with foreign discount department stores such as Zara. Kmart's improved performance in 2014 appears to have cannibalised sales at Target.

The market's message (price):

  1. The $40 level is important for Wesfarmers. It represents the long-term breakout that has so far failed to be confirmed.
  2. Support and resistance levels on price are close, which indicates indecision. This is an attractive trade setup, as the eventual breakout up or down should be rapid.
  3. A failure at $41 will quickly give way to $34.
  4. Given price action is not strong, and the margin challenges in this sector, I'm leaning towards being bearish.

Harvey Norman Holdings

Harvey Norman line chart - from December 1995 to December 2014

Although the stock price struggled post-GFC, more recent price action has been extremely positive, driven by sales data, especially in electrical goods. However, as regularly pointed out by executive chairman Gerry Harvey, the company is fighting an uphill battle as a bricks-and-mortar retailer trying to compete with online. This is likely to heat up in the months and years ahead. The stock trades on a 2015 price-earnings multiple of 16.7, compared with the industry group average of 14.5.

The "correct valuation" splits opinions widely among analysts. Citi's Craig Woolford highlights poor top-line growth and believes future margin growth is already priced in. He believes the stock is worth $2.95, well below its current level.

Conversely, Daniel Broeren of CIMB is bullish, having increased his 12-month share price target from $3.60 to $4.20 following the 2014 results.

The market's message (price):

  1. Harvey Norman is in a large price range that has lasted almost 15 years.
  2. Recent price action has been especially strong against the rest of the retailers.
  3. Volume is showing more demand than supply, which is bullish. (The institutions must be buying.)
  4. Targeting $4.50 in the short-term (25 per cent higher), which I expect. That level represents formidable resistance, however.

Myer Holdings

Myer Holdings line chart - from March 2010 to December 2014

Myer is approaching long-term price support, which could provide support. You will be hard pressed to find a stockbroker who recommends you buy Myer. But they recommended it at higher prices, so don't listen to what they have to say this time either.

Something tells me Myer is one to watch in 2015, despite the large number of sellers. Someone called Mr Lew might even target this stock in the New Year. Anything's possible.

The market's message (price):

  1. Myer is approaching the all-time low, at $1.50, which could act as price support.
  2. We need an indication from price that the stock is going to turn. Anticipation is not enough.
  3. The fall must stop, volume should spike (indicating fund manager interest), and price must make a series of higher lows and highs in the short term; that is, we need a change in trend. Not one of these requirements has occurred yet.
  4. The line in the sand is $2. If Myer can get above that level on a weekly close, it could trigger a rally back to $3.20, fuelled by a potential short-squeeze (short sellers having to close out their positions).

About the author

Richard Lie is the founder of Crusader Capital Management, and the stock advisory service and popular Stockradar trading blog. He focuses exclusively on price analysis to make decisions in the sharemarket. He is licensed by ASIC.

From ASX

The ASX Charting library provides a wealth of free material for beginners through to advanced chartists.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

© Copyright 2017 ASX Limited ABN 98 008 624 691. All rights reserved 2017.