By Gus McCubbing
High-profile retailing brands are struggling to turn around months-long share slumps as shoppers close their wallets, leading to warnings the small-cap consumer sector was beginning to look like a stockpicker’s graveyard even as investors line up to back hot float candidate SkinKandy.
The piercing chain – with 100 stores and close to $90 million in revenue this year – is expected to hit the boards next week after a scramble from small-cap fund managers, including Lennox Capital Partners and Wilson Asset Management, pushed it to upsize its initial public offering to $160 million.
But it is a rush that belies a broadly weak period for consumer stocks – from jewellery giant Lovisa and homewares retailer Temple & Webster – as the lengthening war in the Middle East compounds high inflation and pushes the Reserve Bank of Australia to keep hiking interest rates.
Luke Laretive, portfolio manager of Seneca’s Australian small companies fund, said the retail trade and consumer services sectors were two of the worst performing sub-categories on the All Ordinaries Index this year, both down about 26 per cent.
Only the healthcare sector, which has been dragged down by repeated earnings misses at blood plasma giant CSL and hearing devices company Cochlear, had fared worse, down 28 per cent.
The worst-hit retail stocks this year include online luxury retailer Cettire, with its share price nosediving by nearly 80 per cent, as well as used car refurbisher and dealer Carma and online furniture retailer Temple & Webster, both down more than 60 per cent. Nursery and pram retailer Baby Bunting has shed nearly 43 per cent, while car dealership groups Peter Warren Automotive and Autosports have both lost about 40 per cent.
“Excluding the supermarkets, it’s been a graveyard,” Laretive said.
“While some retailers might have more favourable market dynamics, better management or more growth options, all retailers are cyclical. And this is the most important thing to remember.”
SkinKandy, which filed for an IPO on Monday, plans to open in the United States, United Kingdom and South Africa. Its shares are expected to begin trading on May 21, making it the second high-profile retailing business to list after online furniture specialist Koala floated in March.
Laretive said SkinKandy has been marketed as Lovisa 2.0, referring to the fast fashion jewellery chain backed by billionaire businessman Brett Blundy.
SkinKandy chief executive Dain Friis was previously Lovisa’s chief operating officer, although the two companies are competitors in piercing, alongside other jewellery retailers and the pharmacies.
Lovisa listed with 225 stores and a $210 million market capitalisation in December 2014, and is now worth $2.5 billion with nearly 1100 stores across about 30 countries as of December 31. SkinKandy will hit the Australian sharemarket with a capitalisation of around $246 million.
Lovisa shares are also down nearly 30 per cent this year – enough for Laretive, who usually steers clear of retail stocks, apart from consumer-facing software or financial services names, to take a position.
“We think a 10-year low valuation for a proven format, product and brand, with good growth prospects is a recipe for long-term outperformance,” he said, adding that a $14 million buying spree in Lovisa shares from Blundy in March helped to boost his confidence in the company.
Laretive also jumped on car accessories maker ARB Corporation, the shares of which are down 43 per cent this year. But he will not be participating in the SkinKandy IPO next week. “We think it’s got a pretty ritzy valuation,” he said.
Glenmore Asset Management founder Robert Gregory, another small-cap investor, said the retailers best positioned for a consumer slowdown were either youth-focused, or sold goods at the cheaper end of the market.
For this reason, Gregory likes youth-focused apparel retailer Universal Store, whose customer base he said was less exposed to a rate-hiking cycle.
But Gregory also cautioned that the overall retail sector was in a world of pain that could get even worse, with Westpac tipping a further two rates hikes this year, which would take the cash rate to 4.85 per cent.
He pointed to the fact that even the businesses he described as “best in class”, including electronics retailer JB Hi-Fi at the larger end of the market, and furniture retailer Nick Scali in small-cap world, had lost 26 per cent and 40 per cent, respectively, this year.
“The retail sector is very much out favour due to the pressures of interest rates hikes, cost of living, and the petrol prices being elevated,” Gregory said.
WAM small and mid-cap investment analyst Sophia Mulligan said Universal Store was well-positioned to withstand the rate rises because its customers were young. SkinKandy could also benefit from this. “This is why SkinKandy is resonating,” she said. “It’s the best quality IPO we’ve seen in a while.”
Lennox Capital portfolio manager James Dougherty also participated in SkinKandy’s IPO – he liked that Friis had played a key role in Lovisa’s international expansion, as well as the store economics.
“SkinKandy operates a relatively low-cost store rollout model combined with exceptionally high gross margins, which makes new store openings highly attractive from a returns perspective,” he said.
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