Retail survival of the fittest?

 

“Retailers tend to perform better during economic booms rather than a recession, which has been reflected in the recent poor performance of even the biggest brands. The risk of investing in the sector differs depending on where the economy is in the cycle and it is currently a higher risk sector. 

  

“Failing to predict and respond quickly to changing customer tastes and demands, interruption in supply chains and quality of products are risks that retailers face, however economic factors are currently having the greatest impact on the sector. This is likely to prove sensitive for some time as austerity starts to take effect in the UK and other countries in which companies in this sector operate. High inflation, high unemployment levels and pay freezes are also likely to create some drag on sales as consumers hold back on discretionary spending. 

 

“Tesco has defensive qualities exhibited in its food and drug retailing, as does Sainsbury’s. The supermarket giant continues to expand and build its presence both in the UK and overseas. However, it has not been immune to prevailing economic pressures of its home market. Recent shock results have shown that even Tesco is struggling with the strain on UK consumer spending.

 

“Overseas operations have held up well for Tesco reflecting the growth opportunities in a number of regions in which it trades. It’s the power of diversification of revenue streams that still makes Tesco attractive for investors, over many of its UK centric rivals, and it remains our preferred play in the sector. 

 

“Given the UK and global economic expectations, our outlook on the general retail sector resembles that of the food and drug retail sector. Stock picking is a similar exercise to that outlined between Tesco and its competitors. 

 

“Online fashion retailer ASOS offers over 50,000 branded and own label product lines operating across four geographical segments - UK, US, Europe and the Rest of the World which includes three new regions, Australia, Italy and Spain. 

 

“ASOS reported a 60% growth in first half sales, mainly boosted by the company’s international operations. However, the UK’s sales growth of 8% was below broker expectations. This is an exciting retailer to invest in and recent results reflect many of the comments made about Tesco; UK growth is sluggish, however overseas exposure is helping maintain profit margins. 

 

“Whereas a company like electrical products retailer Dixons is a further example of companies that are reliant on UK sales. The company recently reported a 9% fall in like-for-like sales in the UK and Ireland, however there is some expectation that the 2012 Olympics could see Dixons have a better year next year. 

 

“The competitiveness of the consumer electrical sector and the weakness in Dixons’ share price has led to rumours of major U.S consumer electrical wholesaler, Best Buy, and Carphone Warehouse expressing an interest in the company. However, owning the stock is not for the faint-hearted and if Christmas sales are poor we could see Dixons’ share price weaken further.

 

“Mothercare has also been a major victim of the cuts in consumer spending, although again international sales have helped to offset some of those losses.

 

“Companies are faced with a number of challenges at the moment, including poor management, consumer belt tightening and changes in technology, which are impacting established methods of trading. Companies such as HMV, Woolworths and JJB Sports are victims of these challenges and demonstrate the nervousness of UK investors to invest in retail stocks.   

 

“Uncertainty in the sector appears to have influenced investors’ decisions. Research carried out on behalf of The Share Centre last year showed that 21% of investors held, or had previously held, stocks in the retail sector. However, research carried out in September this year showed that just 6% of investors would consider retail as one of their preferred sectors. 

 

“Going into the Christmas period, market conditions remain poor and consumers are likely to be chasing bargains. This may see favour with retailers with a good online presence, although it may also see some Christmas shopping getting put off until January. However, a number of sales have already started on the high street and these may prove the rump of the Christmas trade. 

 

“At the moment we would suggest investors drip feed into those companies that have shown some resilience and have demonstrated a diverse business strategy. Companies that seem to offer customers value for money should do well.”