Money: A beginner's guide to investing in shares - A window of opportunity
Investment should be fun, so why not shop around for a bargain in the retail sector? Magnus Grimond looks at some of the contenders
Sunday 08 February 1998
As it happens, retailers have just ended their best year for sales since the boom years of the 1980s. But the sector is not partying. Christmas, which accounts for a large chunk of turnover, was a mixed bag for most shops. Indeed, life in general has got a lot tougher since the heady 1980s. Then there were easy pickings for buccaneering types like Ralph Halpern (he of five times a night and Burton), George Davies (Next) or Terence Conran (Storehouse) who built huge retailing empires on the back of an explosion of consumer spending. The recession cruelly exposed just how shaky those foundations were.
The clothes groups Next and Laura Ashley illustrate well the risks and rewards of the sector in the 1990s. Both were casualties of the slump and both went through shake-ups, but their subsequent history could hardly have been more different. Headed by the duo of Lord Wolfson, a scion of the family that founded Great Universal Stores, the slumbering giant of the sector, and David Jones, another GUS refugee, Next has become the retailing success story of the decade. Since 1991, the share price has multiplied nearly 60 times.
By contrast, Laura Ashley has had four management teams in seven years yet the shares, at around 34p, are standing well below the previous low of 1990. A string of problems, including poor management systems and a recalcitrant US business, have dogged the company - traps that Next managed to avoid. More importantly, perhaps, it seems that the Next look has proved more enduring than that of Laura Ashley.
So while management is vitally important in retailing, hitting the right mood is almost equally so. Fashion is fickle. On the whole, the bigger groups can roll with the knocks better than the smaller ones. Take Oasis Stores, a pounds 75m tiddler aimed at the notoriously flighty teens and early 20s market. Launched on to the market at 148p, the shares have been up and over 420p and back down below 150p in the space of just over 18 months. Controversy and stock problems have not helped, but the latest trading news showed that the young things were just not buying the clothes like they used to.
For safety in stores, buy big. At the top of the pile is Marks & Spencer, ploughing on come rain or shine. The shares are rarely a star turn, underperforming the market by around one tenth in five years, made worse recently by a slightly disappointing Christmas trading statement. But Marks remains rock solid. Size, solidity and management strength means Marks easily weathered the year that it got its women's fashion ranges badly wrong back in the 1980s. It has also finally absorbed the poorly timed and over- priced $750m acquisition of Brooks Brothers of the United States in 1988. Representing just less than 30 per cent of the whole sector by market capitalisation, Marks is a core holding.
But even M&S has had to face up to the more competitive atmosphere in retailing in the 1990s. According to Robert Clark, of Corporate Intelligence on Retailing, competition is the watchword of the decade. Until a couple of years ago it was relatively easy for the bigger groups to grab market share from their smaller rivals. "Now we have the most concentrated retail scene in Europe, arguably in the world. You have got three or four big retailers which dominate each sector and have done for a while."
On top of that, for the first time in at least a generation, may-be two, retailers are having to operate without the easy background of regular price rises. Corporate Intelligence figures show price inflation probably slowed to just 1 per cent last year. This has set the giants against each other as they battle for the high street. The scars are clear at WH Smith and John Menzies, two groups whose big market share in areas such as newspapers and stationery should put them at an advantage. Instead, they are suffering as supermarket groups cream off their more lucrative lines and leave them with the dross.
Indeed, the other big retailing story of the past 15 years has been the rise and rise of the supermarkets at the expense of other forms of shopping. Led by Tesco and J Sainsbury, they have quickly moved on from squeezing the traditional corner shop to routing home-grown food discount chains such as Kwik Save. The war has now turned to continental super-discounters such as Aldi, Netto and the like, where the big four supermarket chains seem to be holding their own. Even so, competition and falling inflation have hit margins, which have probably tumbled by as much as a quarter since the last decade. These pressures are forcing the supermarkets into the territory of other retailers such as WH Smith and Menzies. It is a sign of the times that George Davies has made a second fortune selling clothes through Asda.
Supermarket shares have done well during the current Asian turmoil. Regarded as mature businesses, their solidly domestic earnings provide a safe haven from overseas storms. Asda proved to be a rare growth stock in the sector in the 1990s, but Asda apart, there is now an element of Buggins' turn about investing in the food chains. Sainsbury, having been top dog in the 1980s and early 1990s, is only now fighting back against the supremacy of Tesco.
So investing in retailers can be fun and highly rewarding, even for growth stock hunters. But the risks are high, particularly among the small fry, where a catwalk star can become a fashion victim overnight. And bear in mind that even the big groups stumble. Despite strenuous attempts at resuscitation, shares in Sears, once Britain's biggest shoe seller (and owner of Selfridge's), are currently languishing at a 15-year low.
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