Investment: Should you invest in... the retail sector?

AFTER A period of great uncertainty, investors are considering the retail sector. "Investors have seen the trend to lower interest rates and they are looking for a consumer recovery as a result," says Ashley Willing of Gartmore Fund Managers.

"People are buying into consumer stocks in the hope of this recovery and in the belief that we are not going into recession."

This will come not a moment too soon for the beleaguered retail sector. Patrick Evershed, a fund manager at Rathbone Brothers, says:"Retailers have been under pretty severe pressure recently. The prime example is Marks & Spencer. If M&S has had a rough time, you can be certain it has been even worse for lots of other companies."

The size and reputation of M&S has meant that its difficulties have cast a shadow over the whole sector. "The sector is a headache for us," says Geoff Miller, head of research at Brewin Dolphin Securities.

"You have one very large company, Marks & Spencer, at the head of the sector, which we would not touch with a bargepole. We have a neutral recommendation for the sector, which means we like five of its major stocks but don't like the biggest."

The problem with M&S is that it has been very slow to confront its own difficulties. "M&S is a very interesting example of a company that has got it strategically wrong," he adds. "Unlike Next, which held its hands up, admitted its mistakes and put them right, M&S blamed everything apart from themselves. Now they have finally admitted they have got it wrong, it will take a very long time to sort things out."

Another problem facing the retailers has been the reluctance of consumers to come out and spend in many areas.

"It is baffling where consumers' money has gone," Evershed adds. "Interest rates are falling and the economic background is healthy, but consumers don't seem to be spending. There is a surprising disparity between the buoyancy of the housing market and retail sales."

That said, there are signs of considerable confidence behind the bigger players in the sector, M&S excluded. "There are five retailers which are very good companies but, because they sit just behind the sector leader, they can be tarred with same brush," says Geoff Miller.

"Kingfisher is a good play on Europe, as well as the UK, with its French expansion, and European consumer confidence is still sky high. Boots has got over its problems of a pricy acquisition in the Eighties, sorted itself out and is producing very strong results. GUS is almost as much a financial services business these days as a retailer. Dixons is a play on the Internet and the expanding electronic goods market. Next is the best of the clothing retailers."

Ashley Willing agrees that it is the major players that warrant the most interest. "It is the Dixons and the Kingfishers, companies that have strong franchises within their sectors, that we are most interested in," he says. "What we would look to avoid are those retailers who need inflation to get their pricing through and steer clear of franchises that are undifferentiated from their peers."

He cites Kingfisher and Next as examples of this type of strong franchise. "Kingfisher has B&Q and its European business is very strong, whilst Next has maintained its franchise after a period of difficulties." he says. "But more generally, clothing is one of those areas where we are wary of becoming involved as it is very difficult to differentiate yourself."

Patrick Evershed adds: "There have been some much bigger disparities within the sector over recent months. Some companies have been doing pretty well and others have been suffering very severely.

"The food retailers have been doing all right, with Tesco doing particularly well and increasing market share, but they all may be hit by a monopolies investigation."

One area that has suffered has been consumer durables in general and furniture retailers in particular. "Furniture has gone through an especially bad period," Evershed points out. "This is particularly baffling because the housing market has been booming and when the housing market is strong furniture usually does well."

He suggests the recent underperformance of furniture retailers could be due to a previously unforeseen boom.

"One explanation could be that two years ago, with the demutualisations, furniture sales boomed. So it is perhaps not that 1998 was a very bad year but that 1997 was exceptionally good. But the trend is continuing and the latest figures from John Lewis show sales are still significantly down."

He highlights the parallel experience of the carpet retailers to show the variety of performance within the sector. "Carpetright, Phil Harris' company, has been doing particularly well, but Allied Carpets has been doing very badly," he says. "Management skills seem to have been ever more important over the last year than in the past."

Some types of retailer have undoubtedly done better than others. Patrick Evershed says: "Another area that has been doing well is DIY, as that does go up in line with house prices, and anything to do with computer services and the Internet has been strong. One example of a solid performer is Era Group, which owns Beatties, the games and hobbies chain, where one-third of its business is in computer games.

"Electronic Boutique has also been doing well for similar reasons. Dixons has also come up very strongly, partly because of its Internet service, coupled with the arrival of digital TV.

"Initially, digital TV is seen as a negative because it means people will stop buying existing equipment, but over the next two years, those selling digital TV will do very well."

This argument also leads us back to Kingfisher, with Patrick Evershed pointing out that the company's ownership of Comet gives it a stake in the digital revolution.

Geoff Miller also notes that Kingfisher may well benefit from M&S' continued troubles. "The weighting of M&S has come down quite considerably," he says. "It is now much closer to Kingfisher and if it continues to underperform the sector, M&S may even lose its top spot." The generally positive economic background also gives considerable grounds for optimism.

Ashley Willing says: "We are in a low-inflation, low-growth environment, so sales will improve, although we are not going to see stellar volumes. Consumers will be very price aware and very value aware and will go for the retailers with strong franchises or a dominant market position.

"That is why we would look at the majors, where we see better growth and better prospects and stay away from the second-line retailers."

Others take a broader view. The fact that so many retail shares have fallen from grace means that the sector does offer considerable recovery potential. Geoff Miller says: "We are quite keen on consumer cyclicals, and the recent change in sector classifications has helped this by making investors realise there are some retailers which respond to cyclical factors. Interest rates are coming down and we believe there is scope for them to come down further. This will continue to boost consumer confidence and lead to a recovery in these cyclical stocks."

Even the furniture and carpet retailers might benefit. "The really geared plays on consumer cyclicals are the furniture and carpet retailers," he says. "They have got slaughtered but now offer some interesting opportunities if you really believe that there is going to be a pick-up in consumer confidence."

Patrick Evershed says: "There are some very good areas, and so many share prices have fallen so sharply, especially the small companies, that there is considerable scope for improvement. As an example, we have a holding in John David Sports, which sells training shoes. Their shares were at pounds 3.50 in mid-1997 but fell to a low of 48p pretty quickly. They are now just below 130p so they have gone up two and a half times from their low, but this was partly because they had fallen too far in the first place."

PROMOTED VIDEO
News
Teeth should be brushed twice a day to prevent tooth decay
education
News
Bryan Cranston as Walter White, in the acclaimed series 'Breaking Bad'
news
Sport
footballChelsea 6 Maribor 0: Blues warm up for Premier League showdown with stroll in Champions League - but Mourinho is short of strikers
News
Those who were encouraged to walk in a happy manner remembered less negative words
science
Arts and Entertainment
Princess Olga in 'You Can't Get the Staff'
tvReview: The anachronistic aristocrats, it seemed, were just happy to have some attention
News
Renee Zellweger as Bridget Jones
i100
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
tech

Board creates magnetic field to achieve lift

News
There have been various incidents of social media users inadvertently flouting the law
news

Life and Style
Stack ‘em high?: quantity doesn’t always trump quality, as Friends of the Earth can testify
techThe proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
News
Bourgogne wine maker Laboure-Roi vice president Thibault Garin (L) offers the company's 2013 Beaujolais Nouveau wine to the guest in the wine spa at the Hakone Yunessun spa resort facilities in Hakone town, Kanagawa prefecture, some 100-kilometre west of Tokyo
i100
Sport
CSKA Moscow celebrate after equalising with a late penalty
footballCSKA Moscow 2 Manchester City 2: Premier League champions let two goal lead slip in Russia
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

Helpdesk Analyst

£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

Senior Helpdesk Analyst / Service Desk Co-ordinator

£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...

Senior Pensions Administrator

£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

Corporate Actions Administrator / Operations Administrator

£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...

Day In a Page

Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Lonely Planet’s Best in Travel 2015

UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London