Domestic retailers have struggled for the last 12 or 18 months. The domestic economy has been performing below par, and the flow-on effects to consumer and business confidence has resulted in poor consumer spending numbers, while sustained pressure from domestic and overseas online businesses has squeezed margins at the worst possible time.
But it appears that the tide is turning. The Australian dollar has dropped from around US$1.10 to US$0.90 which has made domestic retailers more competitive, and it appears as though consumer confidence and spending is starting to turn the corner.
ABS retail trade data released earlier this month showed that retail spending grew by 1.2% in January (seasonally adjusted), following rises of 0.7% in December and 0.5% in November. Over the last six months the measure is tracking at a 12-month average of 9%. House prices are also soaring, particularly in the Eastern States, and initial data is indicating a further 1.8% rise in prices in the first half of March!
A theory gaining traction from market commentators is that rising property and share prices are finally translating into improving consumer confidence and allowing consumers to loosen their purse strings.
But how can investors take advantage of this trend?
The 1.2% gain was anything but broad based. The biggest gains were from food retailers (a 0.8% rise) and cafes, restaurants and takeaway food services (1.4% rise), while department stores rose by 0.7%, household goods retailing rose by 0.4%, and clothing only 0.3%.
This indicates that the larger department stores focusing on homewares and fashion, such as Harvey Norman Limited (ASX: HVN) and David Jones Limited (ASX: DJS), are less likely to have seen much of a boost in sales.
The best performances may actually come from some names that have had fairly unspectacular starts to 2014. The likes of Collins Foods Ltd (ASX: CKF) and Retail Food Group Limited (ASX: RFG) operate dine-in and takeaway restaurants, with Collins Foods heavily exposed to the Eastern States. These companies operate brands including KFC, Sizzler, Pizza Capers, and Michelle's Patisserie which stand to gain from the ABS figures.
Foolish takeaway
These two companies servicing the fast-food and cheap dine-in markets are likely some of the first companies to benefit from a rise in consumer confidence. Both are trading close to where they started 2014 and appear reasonably good value at current prices.
