Ringing tills return retail stocks to favour
Tuesday 27 April 1999
The rise has been fuelled by improving consumer confidence, which has been boosted by cuts in interest rates and signs of life in the housing market, while fading fears of financial meltdown in Russia and the Far East has boosted the FTSE 100 to near record levels.
Gradually, institutional investors have begun to move back to retail stocks, with some smaller caps making a comeback. But is the recovery sustainable, and have smaller investors missed the boat?
Views on the subject are mixed, but most analysts still see scope for value in stocks that have yet to enjoy the re-rating afforded to companies such as Next. Verdict, the retail consultants, feel the second half of this year will see an improvement in retail fortunes, helped by a "feel- good millennium factor".
Morgan Stanley recently upgraded its earnings estimates on Kingfisher, Dixons and New Look, saying: "With the UK housing market showing tentative signs of a more meaningful recovery and like-for-like retail sales volumes showing some recovery from the depressed fourth quarter of last year, we are increasingly optimistic that the outlook for the second half of 1999 and for 2000 may not be as bad as we originally feared."
Other analysts are more cautious. John Richards at BT Alex.Brown said: "I wouldn't call this a false dawn, but it is a gross exaggeration of how trading is for most retailers. Things have picked up from the nightmare scenario of the last quarter of last year, but retail sales growth is still half the level of a year ago."
Nick Bubb at SG Securities agreed. "Is there much difference for retailers between a hard and a soft landing? Possibly not. Consumers have regained a bit of confidence but are still price conscious. That is resulting in a high level of markdowns and continued pressure on margins. Profits are likely to remain under pressure too."
Mr Bubb points out that the weekly sales figures at John Lewis, one of the sector's bellwethers, are still below budget.
Analysts therefore urge caution in stock selection. But many agree on one thing - that the recent rise in Marks & Spencer shares has been overdone and bears little relation to the reality of the group's trading.
Mr Richards says the bounce in the shares shows "remarkable complacency about prospects". Mr Bubb says earnings estimates could still come down next month when M&S reports full-year results, while there is still talk of a possible dividend cut.
M&S's woes will also have a knock-on effect on the rest of the mainstream clothing sector as the wounded giant cuts prices to help stimulate demand. Companies in the firing line include Arcadia, Storehouse and House of Fraser.
Better value could be found with "cyclical plays" such as the furnishings sector. Analysts point out that sales of bigger ticket items, such as furniture and carpets, tend to lag the rest of the sector by about six months as interest-rate cuts take longer to filter though. The City likes Carpetright, which is the UK's market leader and well placed to capitalise on the problems of its main rival, Allied Carpets. DFS Furniture could also offer value on a forward multiple of 16.
Elsewhere BT Alex.Brown likes Boots and Dixons. Although the price of the latter has been driven skyward by the valuation of Freeserve, its core business should also reap the benefits of the wave of new digital technology products.
Morgan Stanley has raised its target price on Kingfisher to 950p (836p yesterday), saying the proposed merger with Asda reinforces its positive view on the stock.
Its New Look target price has been raised to 270p (240p).
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