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By Richard Hunter, Hargreaves Lansdown Stockbrokers
Even though recent retail sales figures surprised some with their relative strength, the fact remains that the UK economy seems to be heading for a slowdown - and certain of the retailers are likely to face the brunt. First of all, investors should remind themselves of the very significant parts which make up the overall retail umbrella. The most important distinction, of course, is between food and non-food. Whilst the food retailers (most notably the supermarkets) are, to varying degrees branching out into other areas, the food part of their business retains its defensive qualities since we all need to eat, regardless of the economic cycle. Within this distinction, some of the higher end food retailers may see a reduction in their profits, but on a very general basis they remain well positioned to weather any forthcoming storm. This is not to say that opinion is aligned even within this sub-sector - as ever, there are preferred and less preferred stocks. For the record, the general market view of the big three at the current time is Tesco (cautious buy), Morrisons (hold) and Sainsbury (weak hold, tending towards sell). Moving on into non-food, this is often referred to as the discretionary part of retail. Vital though food may be, the demand for the purchase of new white goods, or latterly flat screen TVs, may well go by the wayside in the event of economic pressures. Similarly, the clothing retailers are increasingly trying to differentiate themselves from the competition in an effort to attract new customers - although even this would be difficult in the event of harder times. It would appear that some of the success certain clothes retailers have had in the year to date has been the continuing use of "sales", although this in turn will eat into their own profit margins, even if it does drive volumes higher. So far the need to pass on additional food costs has largely been absorbed by the retailers, but could this last under continuing pressure? And with oil and energy prices continuing to post new highs, will the customer decide not to travel to the High Street at all, let alone the out of town retail centres? In terms of the latter point, a survey recently released by Experian noted that out-of-town shopping centres were bearing the brunt of the consumer slowdown, with shoppers preferring to stay nearer to home, evidenced by a drop of nearly 6% in visitors during June. This latter point may be mitigated for some of the larger players, who have developed large and successful online businesses - nonetheless, if the customer becomes reticent to spend at all, an online alternative will have less of an impact. There was also the slightly shocking news from Marks and Spencer that not only was it finding the going difficult, but the tough environment in the High Street could actually last not just throughout the remainder of this year, but for most of 2009 as well. Even the fact that the trading update was released a week ahead of schedule was a slightly ominous sign. In this environment, any negative news is likely to be seized upon. For M&S, this effective profit warning sent the shares into freefall, dropping 22% at one point, thereby wiping over £1 billion from the value of the company. Over the last year, the shares are down an astonishing 65%. There were therefore other companies which saw their share prices slide in a "read across" from the statement. For example, in terms of upper end food retailing, Sainsbury shares gave up nearly 7% at one point. Meanwhile, a more direct clothing competitor, Next, suffered a near 12% drop on the news. For the non-food stocks, the general market consensus at the moment is understandably cautious, as evidenced by the following majority views - Marks & Spencer (weak hold), Next (hold), Debenhams (weak hold), Associated British Foods (owner of Primark) (weak hold), Kesa (Comet) (hold), DSG (Dixons) (sell), Home Retail (Argos/Homebase) (strong hold). And, for the niche operators, and those retailers without the economies of scale and diversification of their larger counterparts, the outlook will be even more challenging for the time being. If there are any positives to be gleaned from the situation, perhaps the fact that the market can no longer be in denial about the slowdown will result in the distressing news finally being "in the price" of the retailers. On the other hand and, to be fair to the retailers, this particular line of warning about the consumer spending slowdown has been on their lips for some time. Now that the message is hitting home from one of the High Street's best known brands, market watchers and participants alike will be weighing up whether this is the time to be cautiously returning to retailers - or whether, more likely, there may be further pain yet to come. Useful links: |
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