Non-emerging market retail stocks are somewhat out of fashion which is understandable given the impact of the current financial crisis on employment and consumer confidence generally. (China and other emerging markets are a very different story.) In the expectation that consumer spending will recover, I have been looking for a consumer stock which I felt comfortable buying and holding as a cyclical investment. My main criteria were confidence in the management, a coherent and focused business strategy, a clean balance sheet and positive cash flow. A reasonable dividend would be nice but was less important than the other criteria. In other words, I am more concerned about making sure I invest in a company which has the ability to ride out a further deterioration in trading conditions than I am about capturing the greatest possible upside exposure.
Specialty Fashion (ASX: SFH) met my criteria. In particular, the company has no net debt and strong cash flow. The major negatives are (i) margin compression and (ii) the short term impact of the Queensland floods. The company's earnings guidance released last week was also supportive. Accordingly, I added some shares in SFH to the private portfolio today paying AUD1.20 per share.