Investment: Should you invest in... clothing retailers?
Wednesday 31 March 1999
"The market has not been very good over the past six months or so," reports Rowan Morgan, a retail analyst at stockbrokers Teather & Greenwood.
"This is partly because consumer spending is low and partly because there is not enough differentiation between the clothing retailers. They have been concentrating on the safe, middle ground."
There remains, however, a place for clothing retailers within a portfolio, according to David Thornton, head of UK investment at Witan Investment Trust. "We have been emphasising general retailing for some time and have big holdings in Next and Debenhams," he points out. "However, you can't escape the fact that general retailing has been beaten up very badly over the last year, for obvious reasons. There has been a slow-down in the economy, with a generally low-inflation environment and tight-fisted consumers."
Clothing retailers are, indeed, dependent on the willingness of consumers to keep buying their wares and this demand has been sorely lacking in recent months, leading to a classic case of oversupply. "The problem is that there is too much retail space," says Rowan Morgan, "at a time when there is low inflation, so prices have been at best flat, or even slightly down. It is going to remain a highly competitive market."
Dominating the sector is the fate of Marks & Spencer, for years a core holding in many a private investor's portfolio. "The problems at Marks & Spencer are the big issue," Mr Morgan adds. "How Marks repositions itself, in terms of brand, quality and price, is the key factor. The company has diversified - 40 per cent of its UK business is now food retailing - but the food side slowed down in advance of the rest of the business. The question is, at what point will Marks start to recover?"
"Some companies have screwed up, like Marks & Spencer, while others have tripped up like Next," opines David Thornton. "But the overall result is that there has been a lot of doom and gloom around. This has resulted in a considerable de-rating among these companies."
Such a de-rating, of course, creates opportunities. "We have adopted the view that we can see how things are going to improve," Mr Thornton adds. "For some time, we have been firm believers in a soft landing for the economy, and the rest of the market is beginning to take this on board. We think there is some good value to be had, predicated on the basis that the consumer, having been out of the market for some time, is now coming back."
Stock selection, however, is the key. "We remain quite selective in this area," he points out, using the example of two of the bigger clothing retailers, Next and Arcadia Group, to illustrate the point. "Next has been a very successful company that has been very focused on one brand, with excellent long-term volumes. One of the key factors has been the way it has managed its inventory over the years, yet even Next got a season's ordering wrong last year."
The situation with Arcadia is that, despite its size, it does not have the same strengths of brand and management as Next. "Arcadia has improved," says Mr Thornton. "But historically it has been in a situation where it has had to discount to get higher volumes and, in doing so, its margins have been squeezed. Its brands are less strong than Next's, and it is dependent on the health of consumer spending."
Rowan Morgan suggests that while Arcadia has been suffering from the general lack of demand from consumers, Debenhams has been one of the more successful retailers while Next has been benefiting from the problems at M&S.
"Debenhams has done rather better than the others with its emphasis on exclusive brands," he says. "And Next, which recovered from a blip in 1997, is doing very well now. When Marks comes back, Next will find life more difficult."
Concentration is on the larger stocks, since smaller clothing retailers are even more at the mercy of consumer confidence.
"Among the smaller companies, Oasis Stores should carry on quite well, but I think that clothing retailers generally are going to have a pretty poor summer, unless we get some stonking good weather," Mr Morgan says. But there is a reasonable degree of confidence that sales volume will pick up towards the end of the year as the millennium party season starts.
"Further out, I think that during the third quarter of this year, and more especially the fourth quarter, we will probably see sales improve as consumers start spending more," he adds.
The consensus view of the sector is that things will get better as consumer spending improves, but that this will not necessarily mean a bonanza for all clothing retailers. "We are in an improving retail environment, and things have got better in recent months," David Thornton confirms, "but the tide might not be strong enough to raise all boats. We continue to place a premium on management and the brands. You have to be selective, so it is Next and Debenhams over Marks and Storehouse at the moment."
Kieron Root is the editor of `The Investor'
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