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Avoid Retail Stocks

Gary Warner - IRG Equity Advisers Ltd

Friday 29th June 2012

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Many of IRG's clients are seeing what appear to be bargain prices in Australian retail sector stocks and are ringing to ask us - is this time to buy. Our current answer is most definitely "avoid these stocks for the time being".

The reason is quite simple- Australians simply do not want to spend, they do not have the confidence to open their wallets and part with their hard earned cash or even use their credit cards, which they used to view as a magical source of money (although they are now realizing that these funds actually have to be paid back).

This current trend of fear officially known as low consumer confidence is actually becoming more ingrained into the Australian psyche and is unlikely to change anytime soon.

To make matters worse for Australian retailers - business costs are rising and a large number of goods for sale are experiencing falling prices making it impossible to increase margins to cover these rising business costs.

An extreme example of how this can play out for retail stocks can be seen with the recent performance or should I say non performance of Billabong shares (BBG.ASX) these shares were worth $18 five years ago, last week they slumped 48% in just one morning from $1.83 to $0.94 - a spectacular loss in value and one that reflects the company's current profitability.

Now I am not saying that all retail stocks are going to suffer as much as Billabong but I am saying that this sector is very unlikely to experience resurgence any time soon.

Please note that a similar story could be said for the NZ retail sector and as a consequence I am also recommending to all our clients that they stay well clear.

Gary Warner - IRG Equity Advisers Ltd

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