Investment Insider: Bargains to bag at the high street strugglers

Supermarket chain and other retailers could be worth a look

David Kuo
Saturday 02 November 2013 19:30
The tough retail climate could mean good news for ordinary shoppers
The tough retail climate could mean good news for ordinary shoppers

As investors, we should embrace rather than fear conflicting and confusing economic data.

On the one hand, the Confederation of British Industries says UK sales growth has ground to a halt once again, while the Ernst & Young Item club says consumers are happier to borrow than at any time since the crash.

Currently, UK food and drug retailers are valued at around 14 times earnings, which do not look overly expensive.

Meanwhile general retailers, which excludes supermarkets, are valued at 16 times earnings. But within the sector, there is a raft of shares whose valuations do not look too demanding.

For instance, Debenhams is currently valued at roughly 10 times profit, which is below the sector average.

Recently, the department store group reported a small drop in annual profit.

It also flagged up concerns that shoppers' incomes are expected to remain under pressure.

Debenhams' downbeat view was shared by Argos and Homebase owner Home Retail Group, which also posted better sales figures. Half-year revenues at Argos rose more than 2 per cent, while sales going through the tills at Homebase jumped by almost 6 per cent.

Home Retail Group warned that the general retail climate remained tough. And, like Debenhams, it also expects that consumer spending will remain subdued.

Consumer confidence is something that is not in short supply at ASOS.

The online retailer reported a 39 per cent surge in annual revenues, which helped to push up profits by 23 per cent.

Interestingly ASOS, unlike Debenhams and Home Retail Group, is not heavily reliant on the UK for growth.

Debenhams generates around 80 per cent of its revenue in the UK, while Home Retail Group makes all its revenue from the UK and Ireland.

But in the case of ASOS, more than 60 per cent of its sales and profits come from outside of the UK.

Tesco, like ASOS, also generates a big chunk of its revenues abroad. However, Tesco's overseas operations have been its Achilles' heel.

A 67 per cent drop in profits at its European stores and a 7 per cent fall in earnings in Asia, led to a 24 per cent decline in first-half group income.

Nevertheless, it is hard to ignore a retailing juggernaut such as Tesco. Now shorn of its loss-making US business and a joint-venture agreement in place with Chinese partner China Resources Enterprise, better times may lie ahead.

It might take the supermarket time to turn around the various parts of its business, but with a 4 per cent yield on offer, it should keep income investors satiated until it happens.

Retailing in the UK can be an important leading indicator of an economic revival.

Currently the signs, albeit patchy, would appear to suggest that retail activity is slowly picking up.

That said, a high street recovery is unlikely to be immediate and nor will activity rise in a straight line.

But that also means bargains may still be found among the downtrodden retailing shares.

David Kuo is director at

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