It is it very interesting to watch the constant media hysteria...

It is it very interesting to watch the constant media hysteria predicting the structural collapse of discretionary retail in Australia. The main fingered culprit always seems to be internet retail.

While I agree that internet retail is a factor and certainly in categories such as books, make up, perfume ie specific STANDARDISED consumer goods, I am not prepared to accept that it will bring about the destruction of the modern day shopping mall experience.

When I ponder this in the context of SFH, I really struggle to see anything other than a deep cyclical consumer strike, that like all things will pass when the consumer feels more stable in their employment and satisfied that their financial circumstances have returned to a more stable footing.

My reasoning for this conclusion has come about after reviewing prior years financial statements for SFH. Particulary the 2010 FY, which I believe highlighted the changing consumer predicament and their subsequent cessation of spending.

H1 2010 SFH experienced strong sales and margins on the back of the final government stimulus payments that were made in June 09, this combined with low interest rates increased consumer confidence and created a period of high discretionary spending.

However H2 2010 was a totally different market on the back of 6 successive interest rate rises that effectively eroded the average consumers discretionary budget.

The resulting FY result was strong due to the first half with SFH reporting a NPAT of over 30m. What this tells us is that the business is affected more by consumer sentiment than by some structural change in retailing towards internet shopping.

The guidance management have given for FY11 of EBITDA $40-41m clearly shows that the last year has been challenging to say the least. Even using this cyclicaly low EBITDA figure SFH is now trading on an EV/EBITDA of 3.6. Using a more normalised level of 50+m EBITDA we are trading at an EV/EBITDA of 2.9, which I can only conclude is cheap.

How many other companies with no debt, a strong dividend history, with proven mamangement are trading under a PE of 5.5?

Of course the SP could weaken further but we are clearly at a point where value can be seen. I am unsure how long it will take for consumer sentiment to pick up, it may take 1 or 2 years but certainly I see SFH with no debt and a growth story provided from LA Senza as worth some capital.

If we are indeed at the top of the medium term interest rate cycle and the reserve bank starts cutting the OCR then possibly the cycle may start to turn.

This is an unprecedented(at least for the last 15 years) cyclical downturn no doubt but a structural change that renders business models like SFH void, I don't think so.