On a recent trip to Sydney I was pleasantly surprised by the number of healthy food outlets that have sprung up in the CBD and at the airport. A popular CBD food court that used to have mostly Chinese takeaways and burger joints has been overtaken by trendy salad bars.
Later that day, a financial planner who advises small business owners told me about the growing problems in the junk-food takeaway sectors. Even the biggest players were closing some stores as more consumers opted for healthier takeaways.
The next day in Melbourne I was struck by the number of people walking briskly, in their exercise gear and fitness trackers. And how crowded my local gym had become, not with twentysomethings but older people looking to stay active.
It reminded me how fitness is emerging as an interesting investment trend.
Yes, not all suburbs are feasting on kale, quinoa and clean-pressed juices, or have footpaths full of lycra-clad people going for a morning walk to achieve their daily step goal. Australia still has huge problems with obesity, particularly in lower social-economic areas.
But there’s no doubt that better technology, information and more flexible working arrangements are driving greater demand for fitness-related products and healthier foods. The middle-class boom in Asia will, in time, drive new demand for fitness products, from running shoes to athletic T-shirts and tights, and be a boon for sports providers.
Finding exposure to the fitness trend on ASX is hard work. Large activewear companies, such as Nike and Adidas, are listed overseas, only a handful of ASX-listed stocks offer fitness exposure, and most come with other operations. Fitness guru, Lorna Jane Clarkson, abandoned plans to float her popular activewear company in 2014 – a smart move, as it would be worth a lot more now.
XPD Soccer Group, a $6-million initial public offering (IPO) that listed in May 2015, is an option for speculators. Shares in the Chinese manufacturer of soccer boots rallied from a 20 cent issue price to 40 cents, before sinking to 14 cents.
At the risk of stereotyping companies, I am always wary of unknown Chinese micro-cap companies that list on ASX. Too many have destroyed shareholder wealth over the years and had information/governance problems. XPD could have good prospects, but it’s prudent to wait for more information and trading history.
My preferred exposure to the fitness trends is a long-time column favourite, RCG Corporation. The owner of The Athlete’s Foot chain is superbly positioned to benefit as consumers spend more on athletic shoes and wear them for sporting and social purposes. Older consumers buying sports shoes for walking is another tailwind for RCG.
RCG in November said it had a strong start to FY16, with like-for-like sales growth of 5 per cent for the first 16 weeks. RCG has soared from a $1.16 in May when I covered it for The Bull, to $1.79, then falling in the recent market pullback to $1.56. Although the well-run RCG looks fully valued for now, few small-cap Australian retail stocks have such promising long-term prospects.
Chart 1: RCG Corporation (RCG)
Souce: The Bull
Another option for fitness exposure, Super Retail Group, is also a column regular. Unlike RCG, Super Retail does not offer pure exposure to the trend; about 38 per cent of its sales come from the auto business, 24 per cent from leisure and 37 per cent from sports.
I have always thought the Rebel Sports and Amart Sports business in Super Retail have excellent long-term potential. As a parent with primary school children, it is hard to avoid these stores as various sporting equipment, clothing and shoes has to be bought.
Super Retail’s Leisure Group had 5 per cent like-for-like sales growth in its latest trading update for FY16 – a good result in a sluggish retail market. Both stores are benefiting from growth in fitness technology products (albeit coming with lower margins) and Super Retail is integrating Workout World, a provider of gym equipment, into the business. A combined membership base of three million customers gives Super Retail excellent scope for data mining.
Super Retail has rallied to over $10 after strong gains in the past three months. I expect the rally to continue in 2016 as retail sales growth improves and consumers becoming slightly more confident. Keep a close eye on Super Retail around the $10.80 level, its previous point of resistance on the share price chart. If it can break through that, the next leg of Super Retail’s share price growth could emerge.
Chart 2: Super Retail Group (SUL)
Source: The Bull
Ardent Leisure Group is another options for leisure/fitness exposure. After falling from $2.80 in October to $2.10, it is rapidly approaching value territory. Ardent is more related to tourism than fitness; its health club business contributes about 30 per cent of revenue.
The Goodlife chain, hurt by greater competition from lower-cost gymnasium operators, is showings signs after being repositioned to 24/7 opening hours. Membership sales across its 25 converted clubs are rising strongly and member attrition rates are down.
The short-term investment required to convert these clubs to all-hour format is significant and weighing on Ardent’s margins. But sales of higher-value memberships and lower membership attrition rates bode well for Ardent’s health clubs in the medium term.
Chart 3: Ardent Leisure Group (AAD)
Source: The Bull
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices at January 15, 2016.