Who is the most important person in retail at the moment? That’s right: the local postie or delivery driver getting all those online goodies to your door.
Retail stocks fell into two buckets as the pandemic developed. The early winners were mostly e-commerce players, benefitting from the closure of physical retail outlets. The later winners benefitted from buoyant consumer confidence, government support (such as JobKeeper) and fewer things for consumers to spend their money on.
Almost every retailer was a winner. But as we roll into the new financial year, both groups face headwinds.
Share prices of the early winners rose markedly as the pandemic took hold. Despite initial predictions of lower consumer spending, the closure of physical retail meant more dollars for online shopping. Valuations expanded to all-time highs.
As the economy reopened and vaccine rollouts showed success overseas, businesses like online electronics retailer Kogan (SX: KGN) and Redbubble (RBL), an online marketplace for artists, have seen substantial falls in share prices. Lockdowns in Sydney and Melbourne have done little to support share prices so far. While these businesses, and others like them, have good long-term revenue growth prospects, in most cases that is already reflected in their highly valued share prices.
Rosy long-term outlook
One early winner we have pulled the trigger on is the online beauty company Adore Beauty (ABY). Adore’s share price was down substantially since its well-timed initial public offering (IPO) in October 2020. The main seller was the local private equity powerhouse Quadrant, and the IPO was promoted by big-name brokers Morgan Stanley and UBS.
Two days after trading for the first time, investors were nursing a 14% loss. Things didn’t get better as a confusing trading update in April appeared to show growth slowing dramatically (it did slow, but not as dramatically as feared). Seven months after the IPO, Adore’s share price had halved.
That is a good lesson for investors buying businesses off private equity: they are experts at timing their exits.
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