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."
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Board creates magnetic field to achieve lift
Follow the latest events from this Champions League fixture
Like Madonna, Sister Cristina Scuccia's video is also set in Venice
Singer says the track was 'force-fed down people's throats'
techThe original free dating app will remain the same, developers say
- 1 Jack the Ripper: Scientist who claims to have identified notorious killer has 'made serious DNA error'
- 2 Banksy arrest hoax: Internet duped by fake online report claiming artist's identity has been revealed
- 3 Drink alcohol and eat meat to improve male fertility - but cut down on coffee, studies suggest
- 4 Former East 17 frontman Brian Harvey turns up at Downing Street and 'demands to speak to Prime Minister'
- 5 The inventor of the Facebook 'like' button says he never made a 'dislike' button because he feared the 'unfortunate consequences'
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver 'kicks gay couple off for kissing'
Lord Freud: Tory welfare minister apologises after saying disabled people are 'not worth’ the minimum wage
Lord Freud hangs on as MPs of all parties 'call for his head' over disability comments
iJobs Money & Business
£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...
£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...
£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...
£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village