Morrisons offers investors food for thought
Saturday 16 July 2011
news that high-street sales fell 0.6 per cent in June and a cautious outlook from Marks & Spencer fuelled investor concerns about retail investment this week.
Britain's retailers have certainly had it tough over the past year, with rising raw material costs, growing food inflation and a drop in household consumption. And major retailers have been disappearing in increasing numbers. In the last week of June, furniture retailer Habitat, department store TJ Hughes and clothing retailer Jane Norman all entered administration. In addition, other chains declared significant difficulties. Thorntons announced mass store closures, while Homeform – the parent company of Möben – said it would be refinancing.
Notable signs of tough trading also hit the most stable of retailers. Marks & Spencer and Debenhams were among the big names to bring forward summer sales to attract custom.
But opportunities for investors are lurking behind the grim headlines. Food retailers, for instance, are considered more defensive than clothing retailers by fund managers because consumers will always need to buy food whereas fashion is more expendable.
Tesco is held by more than 60 per cent of unit trusts that invest in UK companies, although fund managers have mixed views on its immediate future.
But it is Morrisons that is garnering the most favourable analyst opinion at present. Richard Black, fund manager at Legal & General, is among them. He says Morrisons is the only food retailer he holds in the portfolio of the L&G UK Equity Income fund.
"Morrisons is cheap," he says. "It has a low exposure to long-term leases because it owns its own properties. It is much more profitable and has a high operating margin – about 5.3 per cent, compared to Sainsbury's 3.5 per cent."
Alternatively, investors can gain safer exposure to the retail sector through wholesalers as opposed to the high-street brands themselves.
HSBC's UK Focus Fund holds a position in cash and carry specialists Booker after considering how to maintain retail exposure without all of the risk.
Alec Letchfield, chief investment officer of HSBC's UK Wealth division, explains that suppliers to local retailers have been looking at ways to save money and cutting the cost of raw materials is one way to do this. "Booker was a recovery play at the start and it has been making headway ever since," he says.
Booker chief executive Charles Wilson's recent focus has been on revamping stores, expanding in emerging markets and making small acquisitions to expand the product range.
While some analysts claim that Booker looks expensive to potential investors now, there are others who note an ongoing appeal as its competitors are owned largely by private equity groups not keen on aggressive expansion.
Another play is to opt for luxury goods retailers, which have an insulated customer base. High-end fashion group Burberry is a favourite of fund managers in the current climate.
Tesco was the most popular holding, appearing in almost 61 per cent of funds' top 10 lists. Luxury goods retailer Burberry and Morrisons Supermarkets were the second most popular, each at 9.8 per cent. Marks & Spencer (3.9 per cent) and Home Retail Group (2.9 per cent) completed the top five declared holdings.
This research is taken from the forthcoming issue of 'What Investment' on sale from Saturday 30 July. The author of this article owns shares in Morrison (WM) Supermarkets.
Value still to be had on the high street
With so much gloom surrounding the retail sector, it's easy to presume it would be best to steer well clear. But professional investors say that view is shortsighted.
Julian Chillingworth, chief investment officer at Rathbones, says he believes there will be a gradual improvement in the UK economy with the global macroclimate improving in the second half of 2011.
He explains: "People are taking a pretty negative view on the consumer generally in the UK. Obviously, there are headwinds, but often stocks will get oversold and we are very much in the value camp."
Richard Buxton, Schroders' head of UK equities, agrees, saying there are major opportunities for investors in UK retailers with strong balance sheets and experienced management.
"It will be a long and difficult road, but current share valuations offer considerable protection against the shorter-term trading risks," he says.
"For the patient investor, there will be great opportunities on the high street in the coming years."
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