The Investment Column: Retail sector looks fragile

Retail sector looks fragile

It has been a strange few weeks for UK retailers. In mid-December the doomsayers held sway amid fears of a Christmas sales slump. But the first crop of trading statements from retailers such as John Lewis, Kingfisher and Signet suggest that the pessimism may have been overdone.

The question now is whether at this halfway stage in the high street reporting season, the mood has swung too far the other way. Christmas this year appears to have been rescued by a late spending surge and it is possible that the sales increases being reported may well have been achieved by offering big discounts which will affect margins.

Investors should note that groups such as Sears, Laura Ashley and Argos have yet to report. Sentiment could look very different in a few weeks' time. Most analysts feel that with higher interest rates biting, retailers will find it hard to outperform. Caution remains the watchword.

The sector already has a rather fragile feel. The UK general retailer sector fell by 8.5 per cent against the market last year, hampered by some truly dreadful performances. Laura Ashley was the worst, underperforming by a thumping 82 per cent, followed by Oasis (71 per cent), Harvey Nichols (54 per cent) and Sears (54.5 per cent).

Only two big groups managed double-digit outperformance - Boots and Kingfisher. Both reported trading updates yesterday and even one of this leading duo managed to disappoint. Boots' figures prompted analysts to downgrade their full-year figures while Kingfisher's bullish figures fuelled upgrades.

It seems clear that Kingfisher's B&Q chain is trouncing all others in the DIY market, hence the muted performance at Boots' Do It All. The Kingfisher- owned Superdrug is also recording strong sales gains, some of which may be coming at the expense of Boots the Chemists. On downgraded forecasts of pounds 540m Boots shares are still very highly rated and there is no room for disappointment.

Kingfisher looks better value and Societe Generale Strauss Turnbull now has a target price of pounds 10 against yesterday's 912p (up 27p ).

Given that the sector seems unlikely to outperform in 1998, investors need to select stocks that could benefit from company-specific changes. Arcadia, the Burton multiples business could see an upturn after the demerger. WH Smith could also see demerger benefits. And Allders remains underrated, even after its good run last year.