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Investment special: Which shops to bet on as recovery begins

29 June 2013

9:00 AM

29 June 2013

9:00 AM

After a long, cold and sometimes lonely winter for shopkeepers, at last there are glimmers of sunshine. Retail sales volume surged in May as shoppers shelled out £6.8 billion a week, the highest figure since records began.

Although the rise was partly a recovery from a miserable March and April, depressed by the coldest spring for 50 years, it was also seen as the result of rising consumer confidence buoyed by better economic news and less fear of unemployment. Intriguingly, a survey by American Express claims people using loyalty card rewards more aggressively added up to £3 billion to household budgets over the past year.

Then there is the news that the housing market is finally picking up, as first-time buyers return in force. Mortgage lending has surged to its highest level since the 2008 crisis: the government’s Funding for Lending and Help to Buy schemes, designed to stimulate the market, may prove imprudent in the long run, but they are good news for retailers.

The stock market, as ever, anticipated some of these factors by pushing the shares of most retailers up over the past year. While the FTSE All Share index rose 14 per cent, the general retailing sector rose by more than 40 per cent. The best performers have been ‘recovery stocks’ that have survived while some of their rivals have disappeared. Among these were some I recommended here a year ago, such as the homewares merchant Dunelm, up more than 70 per cent, Sports Direct, up 60 per cent, and Home Retail, 70 per cent higher.

Conventional wisdom says it takes about a year from the beginning of a housing-market upswing before there’s a surge in buyers of new furniture, flooring and the like. Then comes the demand for the latest fridges, dishwashers and washing machines, not to mention the thinnest, widest, smartest televisions.

According to Richard Chamberlain, research analyst at Bank of America Merrill Lynch, that bodes well for sellers of household goods and DIY products. Home Retail, owner of Argos and Homebase, is just such a company and one still favoured by Chamberlain despite a soft first quarter for Homebase. ‘Argos is now responding to the online threat and should benefit from a better product cycle in electricals and from recent capacity withdrawal,’ he says. Could there even be hope for the unloved Carpetright, one of the few retail shares actually to fall in the past year? This week it reported a jump in underlying profits from £4 million to £9.7 million on increased like-for-like sales.

One recovery I missed was Dixon’s, whose shares more than doubled in the last year as it benefited from the demise of its competitor Comet and Tesco’s withdrawal from electrical goods. Its like-for-like sales rose by 4 per cent over the year, helped by a ‘tablet explosion’ at Christmas. While some profit-taking might now be expected, Sebastian James, who took over as chief executive last year, looks set to consolidate his advantage by concentrating on bigger stores and pulling out of problem areas such as France and Turkey.

The big story of the past year has been the growth of online shopping, which has outstripped most City estimates. While overall retail sales rose 3 per cent year on year, online soared by 11 per cent. Clothing group Asos is one brand that has demonstrated the benefits of operating globally and solely online. Only a third of its sales now come from the UK, and analysts predict a steady improvement in profits from £46 million last year to £67 million next year. Despite a fancy rating, analysts remain impressed by the potential for more international growth.

Next has skilfully played the ‘clicks and mortar’ game, in which customers order online and collect from the store — and there’s no sign of pulling back on opening new sites. ‘One props up the other,’ said one fund manager. ‘Customers seem to enjoy the experience of picking up from the stores and then perhaps buying another item.’ Despite the shares rising by 40 per cent year on year, there are few sellers.

Followers are still waiting for Marks & Spencer to catch up, although its shares rose by 37 per cent over the year in anticipation of better news ahead. The company has spent £2.2 billion on its new e-commerce centre, store refurbishment and hiring Belinda Earl, formerly of Debenhams and Jaeger, for three days a week to put some pizzazz into its women’s clothing. Her initial collection was met with acclaim; providing the clothes make it to the stores at the right time in the right sizes, they could herald a brighter era.

Clive Black at Shore Capital believes M&S is coming to the end of a frustrating time. ‘If we see an improvement in ladieswear combined with the new online platform, the cash generative credentials could be very exciting.’ As for bid rumours, he thinks shareholders should not accept less than 560p, against a market price of 420p last week. The hope is that M&S’s new website will attract the affluent ‘grey pound’, now migrating online. The same trend has fuelled the rise of N. Brown, which has added the upmarket Figleaves lingerie range to its traditional plus-size clothing catalogue.

Supermarkets have been the Cinderellas of the sector, their defensive qualities outweighed by intense competition from each other and non-quoted rivals. Clive Black says the big three — Tesco, Sainsbury, Morrison — are being squeezed by a ‘barbell’ movement by consumers. At one end, the discounters Aldi and Lidl are steadily increasing market share with store openings, while at the other, Waitrose continues to power ahead.

A recent survey by Morgan Stanley showed a changing industry, with customers continuing the trend towards ‘repertoire shopping’ (picking a variety of brands, rather than a preferred one) with greater emphasis on convenience and price in their choice of stores. None of this is good news for the quoted big three, who will continue to slog it out. Meanwhile, what a pity you can’t buy shares in Aldi and Lidl.

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