ASX retail shares turned out to be some of the biggest beneficiaries over the last 12 months in the wake of COVID-19. So, it’s not too surprising that they haven’t been spared in the recent tech sell-off we’ve seen recently in response to rising bond yields.
Notable retailers include Redbubble Ltd (ASX: RBL), down 20% in about six weeks, Temple & Webster Group Ltd (ASX: TPW), down 32% and Kogan.com Ltd (ASX: KGN), down 36% across the same period.
If you are currently holding some of these ASX retailers, you might find comfort in knowing that most of them are continuing to perform quite well on an operational level. Instead, it’s broader market conditions that are driving the downwards movement in the stock prices.
Are ASX retail shares a buying opportunity?
Tech shares that have been hit hard recently have typically carried fairly lofty valuations, but I don’t think the same can be said for a lot of ASX retailers.
We can look at a forward price-to-earnings (P/E) multiple to get an idea of the amount of optimism priced into some of these companies. Electronics retailer JB Hi-Fi Limited (ASX: JBH) trades on a forward P/E of 12x based on consensus earnings estimates and Nick Scali Limited (ASX: NCK) trades on a forward P/E of just under 10x. For context, the average P/E ratio for the retail sector is roughly 20x.
Redbubble and Temple & Webster are slightly harder to value on this basis as they’re earlier in their growth phases, but in a recent article which you can read here, I concluded that their valuations aren’t too far off my estimation of intrinsic value.
Low earnings multiples don’t necessarily mean a stock is a screaming buy in my view, but it works well to get a sense of optimism and what the market might be expecting in the future.
Retail outlook
I think some of these low valuations might be the market pricing in certain factors that might affect retail performance.
We know that JobKeeper payments will be finishing up on 28 March, although things may change.
In the same way that stimulus has provided a boost to retailers over the last 12 months, it might be possible that a reduction could have the opposite impact once the change comes into effect.
The temporary Coronavirus Supplement, which has significantly increased income support payments, will also cease as of 31 March.
Low valuations and modest expectations can result in fairly asymmetric upside if some of these companies continue to deliver impressive growth figures. However, only the numbers will tell the story later this year as companies report further financial results.
