Majestic reigns amid gloom on the high street
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Tuesday 20 November 2012
Are there any shops you'd want to be investing in rather than spending in over the Christmas period? Outside the supermarkets that is? They're hard to find. Every trading statement from every retailer these days describes trading as "challenging" and it's not hard to see why.
The consumer will be feeling the effects of austerity for some time to come, and competitive pressures remain brutal not least because of the internet, which poses a problem that many traditional chains are still grappling with.
Even in the good times the industry has a cyclical character. Calling when a chain is going to be in fashion with consumers and investors is never easy.
All the same, there are a couple of stores worthy of your attention, the first being the wine retailer Majestic.
It's simply impossible to ignore yesterday's results. There's been a grim toll of failures among wine merchants. Supermarkets cater for the mass market while those looking for advice on more rarified tipples dubbed "fine wine" tend to gravitate towards specialists at the top end. Those in the middle have been squeezed.
That where Majestic sits, and unusually it requires you to buy six bottles. It's not the place to head for on impulse if you want a good red on a Friday night to console yourself after a bad week.
Oddly enough, though, the formula is working stunningly well. For the six months ending 1 October pre-tax profits increased to £9.2m, up 4 per cent. Total sales eased back 1.4 per cent to £126m, but that's explained by the company pulling out of the wholesale trade – very big sales usually of excess stock – to concentrate on fuelling retail growth. The world wine harvest has been poor so this makes sense, and offers much better margins (wholesale shouldn't be confused with the commercial channel such as pubs and restaurants, where sales are buoyant).
The shares are not cheap, at 16 times full-year forecast earnings, albeit with a solid 3.7 per cent prospective yield. But I would be inclined to buy. A business that can do so well in a difficult economy ought to really motor if there is even a mild improvement.
The next high street winner is in a very different market and Primark is not a company in which you can actually invest directly. It's a part of Associated British Foods.
In November the group reported pre-tax profits of £761m for the year to 15 September, virtually unchanged on the previous year. But "adjusted" operating profit, which strips out various accounting quirks and one-offs with the aim of giving a better picture of how the business's trading operations are performing, turned in a rise of 17 per cent to £1.1bn.
One reason for that was Primark, which achieved sales growth of 3 per cent at stores open for at least a year, with overall revenues up 15 per cent to £3.5bn.
That's not to be sniffed at but if you're going to invest in Primark you'll have to hold your nose. Selling clothes as cheap as it does means the people who make them in parts east of here aren't paid too well. War on Want has been a notable critic although Primark has been touting its commitment to ethical trading on its website.
Sadly, ABF shares are as pricey as Primark's clothes are cheap. They are trading close to a 10-year high at 15 times the year's forecast earnings, with a modest yield of just over 2 per cent. But if you have the shares, hold them. Otherwise look to buy on weakness, although with the relentless rise of Primark I don't expect to see much of that anytime soon. With a few exceptions (see above) discounters and supermarkets are the place to be if you're investing in retail stocks.
To prove the point about discounters look at how well Sports Direct has done. Its colourful founder, Mike Ashley, means controversy is rarely far away. But the shares have been powering ahead. When I last looked (on 7 September) they were at 330p. It won't be long before you'll be sitting on a 20 per cent gain if you followed my advice to hold and I would stick with it.
Finally, a sneaky one. Games Workshop has made the occasional mistake down the years, and it isn't very cheap at 14 times forecast earnings for the year ending 31 May. But just look at the number of kids hanging out in its stores and you'll see why it's a winner.
Despite the lure of computer games, there is still a surprising appetite among a certain group of teenagers for painting metal figures and playing war games with them. So it should enjoy stable revenues (which should alert income seekers – prospective yield of 6.5 per cent).
It will also be making products related to The Hobbit, a film whose release is rather keenly anticipated.
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