Analysts seek out UK retail bargains as consumer outlook brightens
19-04-2018 10:58
It might seem counter-intuitive on the same day that more dismal official retail figures and disastrous numbers from Debenhams coincided, but plenty of contrarian thinkers have already started looking to the retail sector for investment opportunities.
Thursday's report from the Office for National Statistics showed retail sales fell more than expected in March as consumers stayed away from shops amid snow and sub-zero temperatures swept in by the so-called Beast from the East. Sales were down 1.2% on the month and the quantity bought in the three months to March fell 0.5% from the final quarter of 2017.
Earlier in the week, however, the ONS revealed the first real wage growth for a year, as average weekly pay overtook consumer price inflation, with adjusted real wages now growing 0.3% above inflation in February. Inflation is expected to trend down further to be back to 2% by the end of 2018.
This creates the potential for a gradual improvement as we move into the second half of 2018 for consumer-related sectors based on the potential for real wage inflation and some easing off of prior pressures on margin and cost. While the improvement will be gradual, and could see consumers face higher interest rates from Bank of England tightening in May, the stock market is always a few steps ahead.
Analyst Jamie Constable at broker N+1 Singer overnight said that while fundamentals remain tough at present, the improved UK wage and inflation data, together with the recent strength of sterling, "make the case for a re-examination of retailers and other beneficiaries of a potential turnaround in consumer confidence spending".
Singer advised keeping a watch on small and mid-cap retailers Boohoo, Dunelm, Findel, Halfords, N Brown, plus pub companies Marston's and Greene King and restructured casual dining specialist Restaurant Group in particular, as sentiment improves.
In the wake of Debenhams collapsing profits, challenging trading conditions and higher exceptional costs, analysts at RBC Capital Markets said the results may be a small negative for the clothing retailers on the day but there was brighter times seen ahead.
"Given current trading should now improve we think this may create a buying opportunity for UK apparel stocks."
N Brown has full year numbers on 26 April and, encouraged by the pound's recovery to within 5% of pre-Brexit vote levels, the inflection in real wages and seasonal weather arriving, Constable said if the update is in line "the share price has scope to outperform significantly from current levels".
Halfords and Superdry were both backed by analysts at Canaccord late last month, saying on the former that the next financial year will "mark an inflection point in earnings" as currency headwinds subside.
