Last week the U.S. Federal Reserve decided to end QE3, sending a vote of confidence in the strength of the U.S. economy. Indeed, the U.S. has reported a slew of positive economic data over the past few months with consumer confidence now at its highest level since July 2007, in part due to fuel prices hitting a four-year low of less than US$3 per gallon.
According to AAA, the American Automobile Association, for every cent that the national average price falls, consumer spending is expected to increase by more than US$1 billion per year. Given that the national average for a gallon of gas stood at US$3.696 in April, this equates to a whopping US$70 billion in additional consumer spending. If past trends hold true this year, U.S. retailers could be set for strong festive season sales. Could this spark the revival of two ailing ASX-listed retail stocks?
1. Billabong International Limited
Surfing apparel company Billabong International Limited (ASX: BBG) has faced rapidly declining revenues and crippling debt in recent years, raising serious concerns over its ability to stay afloat. It accepted a refinancing plan in September 2013, which in conjunction with an equity-raising earlier this year significantly recapitalised the company.
At the same time Neil Fiske was installed as CEO, bringing with him 24 years of experience in the retail industry and expertise in turning around struggling businesses. In December he outlined a seven–part turnaround strategy, aimed at growing its core brands by reconnecting with key demographics and improving working capital management by narrowing design efforts to fewer styles.
The plan is progressing well, with Billabong reporting a 20% increase in social media reach and the sale of several non-core assets. These initiatives have stemmed the negative trend in earnings, with both the Asia-Pacific and Europe region reporting EBITDA growth in the company's FY14 results. Although the same could not be said of the Americas region, which accounts for nearly 50% of total revenues, Billabong noted in late August that forward order books are ahead in FY15 against FY14 over the same period.
Surfing is still a popular sport as evidenced by Samsung Electronics Co Ltd's sponsorship of the 2014 ASP World Championship, and advances in wave-making technology have expanded interest to those living away from the ocean. Billabong can have a bright future if it executes its turnaround strategy, and now that the surf's up from improved market conditions it could enjoy a swell of a time.
2. Breville Group Limited
Small kitchen appliances maker and distributor Breville Group Ltd (ASX: BRG) has been a standout performer over the past couple of years, generating a return in excess of 300% to trade just under $10. However it was heavily punished when lacklustre performance in the U.S. market was reported in its FY14 results, leading to the resignation of the CEO and sending the stock price tumbling to $7, where it has languished since. The reason for the poor performance was the loss of a lucrative distribution contract as well as lower sales from the juicing category – the driver of substantial growth over the past two-and-a-half years.
Despite this, the U.S. segment actually performed quite well, recording 13.2% revenue growth. The combination of a lower Australian dollar and increase in discretionary income should lead to continued growth, helping to fill the void of lower juicer revenues.
Growth is also expected from the acquisition of the culinary division of PolyScience, a market leader in sous-vide equipment. The health benefits of sous-vide cooking has lead to increased demand from home cooks, with the U.S. National Restaurant Association naming it in its top five food preparation methods for 2014. Although this has also spurred increased competition in this space, the brand strength of PolyScience as well as a product offering in the entry-level price range should see Breville capture a significant slice of the market.
Should you buy?
The Fed is the first to signal its intentions to start the tightening cycle whilst other developed countries like Europe and Japan are still supporting their economies with unconventional policies. Weaknesses from them (or any unforeseen event) could halt the recovery, so it's more prudent to adopt a wait-and-see approach and add these companies to your watchlist.
