Retailers around Australia appear to be in a world of pain with yet another home-grown retail icon entering a trading halt as it provides an update to the market on an imminent earnings downgrade.
On Monday, luxury handbags and accessories retailer OrotonGroup Limited (ASX: ORL) asked the ASX to halt its shares as management expects to report a material downgrade to earnings compared to the prior corresponding period.
Oroton's trading halt comes weeks after leading footwear retailer RCG Corporation Ltd (ASX: RCG) announced its second downgrade in the space of three months and MYER Holdings Ltd (ASX: MYR) reported a drop in both third-quarter and same store sales.
Whilst many are blaming the general decline in retail spend as a by-product of rising house prices (reducing affordability) and a side-effect of international giants Zara and H&M entering the market, I don't believe the entire retail industry is dead just yet.
In fact, if rich-lister developer Tim Gurner is to be believed, I think food retailing is bursting at the seams, making the general sell-off in discretionary retail stocks an opportune time to buy companies leveraged to the "millennial trend" of eating out. In my mind, Collins Foods Ltd (ASX: CKF) and Retail Food Group Limited (ASX: RFG) are best placed to ride this boom. Here's why.
Collins Foods
Collins Foods is Australia's largest franchisee of KFC Restaurants. The company owns and operates 191 KFC stores in Australia and recently acquired a further 11 KFC restaurants in Germany and 16 KFC stores in the Netherlands. The group additionally owns 20 Sizzler restaurants throughout Australia and has 69 franchised Sizzler outlets in Asia.
For the first-half of 2017, the group posted an admirable 4.7% increase to revenue, translating to a 17.2% increase to underlying net profit after tax of $16.8 million. Although these headline results were assisted by new store openings, given same store sales were down 0.6% across both the KFC and Sizzler brands, I believe the company remains poised to grow given its foray into international expansion. This could be in a similar way to Domino's Pizza Enterprises Ltd (ASX: DMP) has done.
Accordingly, although retail spending is flat-lining, I believe Collins Foods' future remains bright.
Retail Food Group
Like Collins Foods, Retail Food Group is in the sweet-spot of discretionary retail spending. With the master franchisor owning the Brumby's Bakery, Michel's Patisserie, Donut King, Gloria Jean's Coffee and Crust Pizza brands, it is likely that one of its franchisees will have a presence in your nearest shopping centre.
Whilst I'm cognisant that the arrival of e-tailers like Amazon could mean lower foot traffic to shopping centres, I'm willing to bet that most people that end up going to shopping centres for a "browse" are willing to stop for a coffee along the way. This is where Retail Food Group steps in.
With its vast franchise network and vertically integrated supply chain, the company is well placed to capitalise on foot traffic to shopping centres, notwithstanding the fact that customers aren't spending at the chain department stores.
Foolish takeaway
Although rampant house prices are curbing spending at long-standing retail stalwarts like Myer, David Jones and some Premier Investments Ltd (ASX: PMV) owned subsidiaries, the fact is that food retail is surging. This is arguably because social changes mean younger generations prefer to spend their $19 on smashed avocado and other food items, instead on material possessions sold by these types of retailers.
Accordingly, whilst food stocks may be affected by a general slow-down in discretionary spend, I believe the recent sell-off in all retail-related stocks presents an opportune time to buy both Collins Foods and Retail Food Group, given their long-term prospects.
