A less cautious consumer: Good news for discretionary retailers (finally!)

In a blog post last year, I wrote of the lost decade for discretionary retailers; expected profitability was little changed from ten years earlier. A number of structural and cyclical headwinds continued to adversely impact the sector, including the persistently strong Australian dollar, consumer caution associated with the financial crisis and increased competition from e-tailers. In this post, I argue that signs of a less cautious consumer are emerging. There is downside risk to the household saving ratio as households become more optimistic about the future, durable goods spending continues to recover and consumer sentiment should benefit from the positive reaction to the Federal Budget. Against this backdrop, I recommend investors neutralise their under-weight bets in discretionary retailers, with a view to moving overweight as more signs of a less cautious consumer emerge. Getting the sector call right is more important than stock selection, but we highlight stocks that offer the strongest upside, including Echo, GUD, Harvey Norman, Premier Investment and Super Retail. (VIEW LINK)