The high street’s double-dip winners and losers
As austerity bites, competition in the high street grows ever more ferocious. Only the nimble and well-financed can thrive. While January and February showed some improvement and sunshine helped boost sales in March, the trend looks likely to be lower again in April. ‘The situation remains fragile,’ said Judith McKenna from Asda, chair of the CBI retail survey panel. ‘Consumers are still holding off from buying bigger ticket items, and opting to spend on smaller “treat” purchases that give them a lift without breaking the budget.’
According to Asda’s Income Tracker, the average UK family has only £144 of weekly disposable income to spend, a fall of 6.5 per cent from a year ago. Despite this, retailers polled by the CBI predicted better trading in May: the hope is that lower inflation will encourage consumers to spend more. Retail shares tend to benefit early in the economic cycle and despite the official double dip, anecdotal evidence still suggests recovery is on its way.
Amid the gloom there have been vast differences in fortunes. Sports Direct, which owns the Slazenger and Lonsdale brands, reported sales up by 13 per cent last week and expects to do well in the run-up to the Olympics. The shares have risen almost 40 per cent this year but fans remain keen. Jonathan Pritchard at Oriel Securities notes ‘a relatively low valuation of ten times earnings and… good potential for the online business’. International luxury brands have bucked the trend with shares in Mulberry, the handbag group, up 63 per cent in a year.
Dunelm is another one to watch. A Midlands-based out-of-town homewares retailer with 100 stores, it is growing fast. The shares have risen 15 per cent this year but look set to continue their run. Companies such as Dunelm and Next which successfully combine ‘clicks and mortar’ — stores and online shopping — are very much in favour, although Next shares (up more than a third this year) look likely to mark time after a stellar performance.
In fashion, good management has proved crucial. While Burberry (up 13 per cent on the year) and Debenhams (up 18 per cent) have done well, Aquascutum and Peacocks have collapsed into administration.
In such uncertain times, investors prefer companies with money in the bank. At Bank of America Merrill Lynch, retail analyst Richard Chamberlain highlights companies with the potential to use cash to buy back shares. ‘Over the long term,’ he says, ‘a successful quantitative strategy has been to own companies that reduce their shares aggressively over time.’ That has been one of the keys to Next’s earnings growth, while Debenhams is expected to initiate share buybacks in the second half of this year.
Chamberlain also expects WHSmith to continue to buy back shares at a rate of £40 million to £50 million a year. Some City observers feel chief executive Kate Swann’s successful strategy of cutting costs and replacing low-margin music with higher-margin celebrity books and quality stationery is running out of road, but Chamberlain sees further scope to cut costs. He also feels the market is underestimating WHSmith’s international potential.
In the home improvement sector, Kingfisher is recovering some of its old form under chief executive Ian Cheshire: its B&Q chain is regarded as superior to rival Homebase, while Chamberlain also believes Kingfisher has the potential to start returning cash to shareholders.
As for supermarkets, the picture is as gloomy as ever. ‘Against a background of falling real income, food retailers are having to work harder, [and] invest more on better stores and marketing,’ says Clive Black at Shore Capital. After Tesco’s profit warning in January followed by marginally higher full-year profits of £3.7 billion, the shares tumbled 20 per cent and show little sign of recovering. Tesco’s UK market share has slipped as Asda and Sainsbury lure shoppers away. The received wisdom is that in Sir Terry Leahy’s last years the company reduced UK investment to finance expansion overseas which has not yet reaped rewards; its Fresh & Easy venture in the US has to date lost nearly £800 million. The jury is out on whether new chief Philip Clarke can turn the company back onto a growth track — and the shares are best avoided for now. Of the other supermarkets, Sainsbury has the best momentum, says Clive Black, while Morrisons is being squeezed by US-owned Asda.
One company that looks ripe for a rally is Marks & Spencer. Little seems to have happened in the two years since Marc Bolland took over from Sir Stuart Rose at the top; in the past year the shares have drifted from 390p to 360p, where they languish on ten times earnings. However, there are signs that Bolland’s overseas expansion could soon start to bear fruit and — not before time — the company is increasing its online presence. The food side has performed well, helped by the trend for the squeezed middle class to eat premium food at home, rather than go out. And a campaign led by Joanna Lumley inviting customers to bring old clothes to M&S stores for recycling, dubbed ‘Shwopping’, shows a company in tune with the zeitgeist.
Investors can expect continued disparity in performance, but shares in shops that have used the past three years to invest, innovate and trim costs will be the first out of the traps when recovery finally materialises.
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