Consumer discretionary includes retailing, media, gaming, services and automobiles. While the market is now down 3% for the last 52 weeks, consumer discretionary has had a flat performance.  

In this time, there have been some wild swings. G8 education is down 56% in the last 52 weeks, while IDP Education is up 64%.

What drives valuations in this space?

Consumer confidence, the wealth effect, organic growth, store rollouts and competition are the key areas to analyse when looking at this sector. The sector is cyclical in nature and highly tied to the economic cycle. Once business is mature, usually significant risk is undertaken to try and ensure growth. This is usually in the form of expanding to other overseas markets.

What investors should keep an eye out for

Structural change has beset this sector for the past decade. We’ve seen a move from “bricks to clicks”. Still, niche players have enjoyed strong sales, usually driven by a strong internet presence and in-house brands that offer higher margins.

Warning signs

This sector is cyclical and there have been several soft trading updates in recent weeks, including from MHJ, TRS, SUL, NCK, FLT, WPP, MEA, BAL, KGN & BWX. 

Favourite stock in this sector?

All Baby Bunting’s four largest competitors have gone bust. Generally, in the immediate period after a competitor goes out of business, there is irrational pricing as inventory is cleared. While in the short term, this is a negative for competitors, in the medium term, this is a positive for existing players. Market share due to this should improve over the next 12-18 months for Baby Bunting despite Amazon building out its range. Further, many big ticketed baby related products, such as prams and cots are items buyers want to try and research in person before a purchase, which gives Baby Bunting an advantage compared to internet-based offerings.

Currently, key brands such as Bugaboo and Britax, are not stocked by Amazon, which gives Baby Bunting a competitive edge. When analysing retail concepts, a combination of strong organic growth together, with a rollout of stores, is a winning combination. Baby Bunting has seen strong organic growth with the first six weeks FY19 seeing same-store-sales up 9.8%. With a rollout target of 80 stores, this should underpin improving growth in profitability. The company currently has 47 stores and has historically guided 4-8 new stores per year.

My tip?

BBN: all major competitors have gone bust. Last one standing. Buy