As a few faint glimmers of hope appear on the horizon of global share markets, some investors are sorting through the carnage looking for bloodied and beaten shares of solid companies.  In Australia, the Retail Sector has suffered like few others.  However, one space within the sector has been growing, even in the midst of the recent downtrends – online sales.

Australian Bureau of Statistics (ABS) reported a 15% increase in online sales amongst Australian retailers in Fiscal Year 2010.  Market Research firm IBIS World predicts 8.6% growth per year over the next five years.  Others claim the nation’s push into a National Broadband Network will drive online sales much higher. 

As further proof, big money is getting on board.  On 23 May 2011, an investment group including Australian business titans James Packer and Andrew Basset along with American hedge fund Tiger Global shelled out a healthy 80 million dollars to Australia’s number one online retailer, Catch of the Day.  A month earlier, James Packer and his own Ellerston Capital firm invested more than 10 million dollars into another top Australian online retailer Deals Direct.  

Here is a table of Australia’s top ten online retailers, by traffic and revenue.  We have included their website address.

Of these ten retailers, only two – Woolworths and JB Hi-Fi -- are publicly traded companies.  Investing in the other companies on the list is currently left in the hands of venture capital and investment firms.  But for the retail investor looking to get into this space, are Woolworths and JB-Hi-Fi your only options?

Online sales in the United States accounts for about 12% of total retail revenue while here in Australia it is about 7% as of 2010.  Many of Australia’s major retailers have shunned the space in the past but that is rapidly changing as these latecomers see the handwriting on the wall.  

Here is a table of some of Australia’s top retailers with online sales operations currently in place.  We have included their website address, current share price, year over year share price movement, and 52 week highs and lows.

With this list as a starting point for further research, investors of all risk appetites have something to look at.  Note that WES and ORL managed to hold down share price decline in spite of macroeconomic concerns.  Conservative investors would do well to look into these shares and their growth prospects for online sales.  Wesfarmers operates an online grocery site and general merchandise sites in both their K Mart and Target operations, although these sites have limited offerings.  Oroton is a speciality retailer, focusing on high end leather and fashion goods.

At the other extreme, JBH has been slapped silly over the past year and has been the most shorted share on the ASX for several months.  They recently augmented their online shopping convenience with a mobile phone application allowing consumers to shop, order, and check existing orders from their smart phones.  Their online sales increased by 68% in the second half of Fiscal Year 2011 and 52% Year over Year.

The other public company in the top ten, Woolworths, operates both an online grocery site and a general merchandise site that mirrors products available in their brick and mortar locations.  As of early 2011, the company reported online sales were growing at a rate of 75% a year.

As you may know, when researching retail shares investors have the added benefit of being able to visit the stores.  Here you have the opportunity to visit each of the websites of the publicly traded companies and compare them against the sites of the successful private companies in the top ten list.

The public companies we listed have the advantage of multi-channel distribution.  The Internet is changing the way we shop and experts now estimate that as many as 65% of all “brick and mortar” sales actually start on the Internet.  A quality website allows consumers to compare technical details and read reviews from actual product users.  

In times past some retailers worried that online offerings would cannibalise their “brick and mortar” stores.  However, market researchers tell us this new “brick and click” business model allows one distribution channel to complement the other in positive ways.

The world’s largest Internet retailer is Amazon.com.  Without any means for consumers to “touch and feel” before buying, many resort to visiting brick and mortar locations and then buying on Amazon.  With a multi-channel model, the company benefits regardless of where the sale is actually made.

Amazon has one unique aspect that bears mentioning.  They offer products from multiple merchants.  From our list of publicly traded Australian online retailers, only one has that additional advantage – the Westfield Group.

You may have been wondering why WDC is even on the list, since their principal business is managing shopping centres globally.  In May of 2011 Westfield opened Australia’s first online shopping mall.  The site is populated by merchants from brick and mortar Westfield shopping centres.  Consumers can pay online and pick up their purchases in a store, or have them shipped directly.  An additional benefit is the ability to make purchases from multiple stores in a single transaction.  

While niche and speciality retailers have their place, consumers appear to be increasingly drawn to sites with a wide breadth and depth of product offerings.  Amazon is credited with starting the online shopping boom back in 1995, migrating from bookseller to purveyor of thousands of products.  How far has the space grown since then?  The following graph from a recent article in The Australian.com shows the kinds of goods Australians are buying online right now:

As you can see, Australians are buying a multitude of goods on the Internet.  From our list it appears WDC, WES, MYR, and WOW offer the widest array of goods.  Of course, this is no guarantee they will outperform.  However, one of the risks involved with investing in a niche retailer like Oroton is the impact of new players entering the niche.  The product diversification of the general merchandise retailers provides a safeguard, although not a guarantee.  Let’s take a look at some valuation ratios and dividend yield for the four companies:

As you know, a P/E of 15 is generally considered average with P/Es above an indicator of a growth share and P/Es below an indicator of value shares.  These ratios need to be taken in the context of the sector in which they operate and direct competitors within the sector.  The P/E for the Real Estate sector of which WDC is a part is 11.18 while the P/E for the Retail sector is 11.79, and MYR is in this sector.  Food and Staples Retailing, where WDC and WES belong, has an average P/E of 15.52.

Looking only at their P/E Ratios, MYR and WOW appear slightly undervalued by market participants while WES appears slightly overvalued.  

While P/E is a widely used valuation ratio, it is based on market perception, as is the Price to Book Ratio.  The P/B indicates how much investors are willing to pay for the company’s assets.  Book value per share (BV) is an accounting valuation, based on the net asset value of the company.  BV is calculated by first subtracting total liabilities from total assets and then dividing the result by the number of outstanding common shares.  

While some accounting gimmicks and conventions can distort calculating asset value, the BV can be a great indicator of bargain buys.  In theory, comparing the market value – the current share price -- to the book value per share can indicate both overvalued and undervalued shares.

In practice, market price is a measure of expected growth beyond current book value and will generally be higher.  This is especially true in bull markets.  However, there are rare occurrences where the share trades below its book value per share, which would be indicated by a P/B under 1.0.

Many value investors look for shares with low P/Bs and in our table you can see a P/B of 1.05 for the Westfield Group.   The BV, which we included because it is not often displayed on financial sites, can be directly compared to the current share price.  You can see WDC’s current share price is tantalisingly close to its book value per share.  

Low P/B ratios or low BV ratios are not always indicators of the market undervaluing the share.  They could also indicate the company is in trouble.  While its low P/B alone is not a reason to jump in with an investment, it could make WDC the most attractive of our prospects.  They anticipate increasing the number of retailers on the online shopping mall by 25% for the Christmas holidays.  Keep watching.

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.

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