Should You Invest In UK Retail?

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Death of the high street- Can investors still make money in the UK retail space?

As is now tradition, January has seen the release of yet another batch of apocalyptic articles highlighting the decay of the UK’s high streets.

According to figures from the British Retail Consortium, UK retailers suffered their most difficult Christmas period in a decade last month. Meanwhile, a separate report from Barclaycard said consumer spending grew just 1.8pc year-on-year in December. Growth has not been this low since March 2016.

The festive woes topped off an already-difficult 2018 for the consumer sector. The number of uninhabited UK shops, pubs, and restaurants soared by more than 4,400 in the first six months of the year. Then, the second half of the year saw high street stalwarts like House of Fraser, HMV, and Maplin each go into administration.

This decline looks set to continue as well. Recent research from Awin found that more than 50pc of UK consumers either ‘never’ or ‘almost never’ shop on the high street. Just one in six said they thought a future exists for these businesses.

These opinions are also being echoed in professional circles. Publicly disclosed data from the Financial Conduct Authority found that short positions in the consumer sector increased 20pc in the last quarter of 2018. They now represent nearly a third of all UK shorts.

The reasons given for this poor sentiment are as familiar as they are diverse. All retailers are said to be feeling the impact of things like Brexit fears, higher interest rates, currency fluctuations, slowing consumer credit take-up, and increasing business rates.

Meanwhile, an ongoing issue more specific to high street retailers is the ever-increasing popularity of online outlets. Indeed, November 2018 saw online sales as a proportion of all retail sales exceed 20pc for the first time as shopping continued to favour the convenience of the web.

This combination of difficult UK macro conditions and a changing industry structure will be enough to put many investors off the retail sector. For others, however, a look at retail stocks on a case-by-case basis will unearth strong names that are being battered by sector-wide concerns despite their ability to adapt. Here, we take a look at a few popular names among UK investors.

Online opportunity

For those investors who are not concerned by macro weakness and believe that internet retailers could offer plenty of future upside, two popular names are Boohoo and Asos.

Boohoo is an online-only fashion retail business with a £2.1bn market cap and 183.75p share price. The company’s shares took a bit of a hit last week when it released its results for the final four months of 2018. This came despite it revealing strong revenue growth of 44pc, a gross margin of 54.2pc (up 1.7pc), and a healthy cash balance of £189m.

The firm also said group revenue growth for the year to 28 February 2019 is expected to be 43pc to 45pc. This is ahead of its previous guidance of 38pc to 43pc. The fact that the company is seeing margins grow and outperforming is very impressive considered the weak figures released by many other retailers of late.

It is likely that investors were concerned about the fact that sales at the group’s largest division (also called Boohoo) came in slightly below expectations at 18pc. However, growth at its Pretty Little Thing brand roughly doubled year-on-year. With the firm investing heavily in this division, such growth demonstrates good management and return on equity. With this in mind, things are looking bright moving forward. Its recent weakness could represent an interest entry point if you are not concerned about valuation.

As mentioned, another popular stock is Asos. Unfortunately for existing investors, the business’s share price took an absolute battering last month when it released a trading update for the first three months of its financial year.

Despite delivering sales growth of 14pc, the firm said it experienced a significant deterioration in the critical November trading month. It added that conditions remain challenging, citing economic uncertainty, weakening consumer sentiment, and – interestingly for an online-focused business -unseasonably warm weather. In response, the firm revised its full-year sales forecasts down from 20-25pc to 15pc.

Shares dropped from 4,186p to 2,281p in a matter of days following the news. The firm has since recovered slightly to 3,029p, but they remain well below the 7,730p they were trading at last March. Despite the fall, some will still argue that the business still looks over-valued.

However, as highlighted by Motley Fool, in a recent interview, CEO Nicholas Beighton said: ‘This is just a bump on the road for ASOS. Our ambitions for the future haven’t changed. We know we’re capable of achieving.’

If you think Asos can successfully harness the growth of online shopping to excel over the long-term, then you might want to join the company’s directors in using the weakness as an opportunity to buy shares.

Back to the street

This month has seen shares in traditional bricks and mortar retailers like Halfords and Debenhams crash after revealing poor Christmas trading figures. However, it may not be worth vetoing the UK consumer sector entirely.

Indeed, while the picture may be gloomy, several stocks are bucking the trend and thriving – or at least outperforming – in the current economic climate. As such, it is essential to look at how well retailers are adapting to trends and changing behaviour on a case-by-case basis. For example, it may be worth focusing specifically on the strength of a particular stock’s online offering – after all, this is now one of the most critical aspects of any retailer’s offering.

A group of firms enjoying some much-needed outperformance of late has been the UK’s supermarkets. Indeed, both Morrisons and Tesco are relishing a solid start to 2019 after revealing year-on-year sales growth. It will be interesting to see if the mini bull run in these companies’ shares can amount to something significant over a longer-term basis.

Likewise, not every listed member of the more traditional high street space has seen huge sums wiped off their market cap so far this year. After an awful end to 2018, Marks and Spencer has bounced from 242p to 289.5p this year. The firm enjoyed a boost after revealing a stronger than expected trading update for the final quarter of the year. In particular, it appears to be experiencing a grassroots recovery in its food division, as it highlights:

‘Our food business traded successfully over Christmas as customers responded to improved value.  Our transformation programme remains on track.’

That said, the British chain remains the second most shorted stock on the UK market, so plenty of caution should still be exercised.

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Meanwhile, clothing and homeware retailer Next has enjoyed a massive rally since the beginning of the month. In a trading update, it posted a 1pc increase in full price sales from October 28 to December. While this may not seem significant, the fact that it has been achieved in such a difficult period for peers should not be overlooked.

We will certainly be keeping an eye on Next and Marks & Spencer to see if this strong performance can continue throughout the rest of the year.

In May 2018 ITV covered the story which you can find here

The author was remunerated but does not hold shares in the company 

 



Categories: Bulletin