Around this time last year consumer confidence fell off a cliff and the share prices of multiple retailers followed as the federal government's austerity budget shook the nation's economic confidence. This year's budget is designed to reverse course with small business and retailers expected to be particular beneficiaries of government largesse.
Recent data points also suggest an uptick in consumer confidence and economic activity, although the economic outlook remains soft and investors need to tread carefully in a retail sector of distinctly mixed performers.
The good
Premier Investments Limited (ASX: PMV) is the conglomerate behind the Jay Jays, Just Jeans, Dotti, Jacqui E and Peter Alexander bricks-and-mortar stores around the country. These apparel businesses generally delivered some good growth amidst challenging conditions in 2014, with Peter Alexander a standout performer and prospect.
Premier also owns the world's hottest stationery brand in Smiggle, which sells colourful stationery and school equipment for children worldwide. In a little over 10 years, the brand has grown into 177 operating stores across Australia, New Zealand, Singapore and the UK. The recent entry into the UK has been a spectacular success, with 15 of the 19 top-performing Smiggles stores now located in the Old Dart. The group estimates it can add 200 UK stores and sales of $200 million over the next five years.
Premier is also growing its brands strongly into the profitable online channel, has a cash pile of $286 million and pays a healthy 3.7% dividend. A weaker dollar also provides an exchange rate tailwind to one of the most experienced management teams in the business.
The bad
When the dollar was riding high, internet-savvy shoppers shunned local retailers in favour of popular offshore operators like UK-based retailer ASOS. Established in 2000, ASOS is an online-only fashion retailer that reached a market value of around $7.5 billion in 2014. Its local website aggregates multiple fashion brands for sale and ranked number one for popularity in the retail-apparel category in 2014.
For the financial year ending August 31 2014 it sold around $200 million worth of clothes to Australian fashion followers. Although sales briefly weakened in tandem with the dollar's fall, it has returned to sales growth in Australia recently and this online department store is eating into the market share of bricks-and-mortar rivals.
One likely victim is department store and brand aggregator Myer (ASX:MYR), which looks in trouble after years of under-investment in its department stores translated into a lack of shoppers and falling profits. Myer now faces every retailer's nightmare of rising costs and flat revenues; worse is that its decline in the public psyche may be hard to reverse.
The ugly
Other retailers have sailed into trouble independently of the ebbs and flows in consumer confidence or competition and online upstarts. Poor management took the iconic Billabong International Limited (ASX: BBG) brand from fashion leader to out of its depth corporate failure.
The surfwear business did recently ride back into profit for the first time in three years, although remains an example of how fashion's fickle nature can inflict almighty losses on unwitting investors.
Foolish takeaway
You can add OrotonGroup Limited (ASX: ORL) and Kathmandu Holdings Ltd (ASX: KMD) to the list of struggling retailers as evidence mounts that there's probably more than falling confidence behind the sector's troubles. Shifting sartorial attitudes among the youth market in particular are one factor, while increased competition from the US and Europe in an online or physical store format is another trend set to increase.
Any decisive lift in consumer confidence is not to be sneezed at, but shopping for stocks in anticipation of a short-term budget boost is fraught with danger. Investors should look to the long term and buy businesses that will perform well independently of any short-term factors.
