Investment: Should you invest in... clothing retailers?

INVESTORS WHO adopt the principle that it makes sense to invest in the providers of products and services that they see people actually buying on the high street will at present be avoiding the clothing retailers. For this group of companies has under-performed markedly over recent months, primarily as a result of depressed levels of spending on the high street.

"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'

Start your day with The Independent, sign up for daily news emails
News
i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Arts and Entertainment
Secrets of JK Rowling's Harry Potter workings have been revealed in a new bibliography
arts + ents
News
Down-to-earth: Winstone isn't one for considering his 'legacy'
people
News
news
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower