By Rob St George of Citywire
‘Sell in May’ is an old investment axiom given new meaning by the UK’s retail sector this year.
After two consecutive flat months in March and April, UK retailers recorded sales growth of 1.4% in May, according to the latest British Retail Consortium/KPMG Retail Sales Monitor. That puts the growth rate back in line with the 12-month average of 1.5%. Online sales expanded at an even faster pace in May, surging by 13.7% compared with a year ago, more than double April’s growth rate.
Online’s share of sales also rose, with the British Retail Consortium/KPMG survey putting the online penetration rate – the proportion of sales attributed to the online channel – at over 20% in May for the fifth consecutive month.
For both online and in-store sales, clothing and fashion were the primary drivers of May’s strong numbers. Such sales had fallen in April, however, so May’s bump may only reflect the one-off boost from shoppers building their summer wardrobes.
While May’s elevated sales could perhaps mark the beginning of a positive trend, then, they should be interpreted in the context of the weaker months earlier in the year.
Those looking to invest in the UK’s retail stocks, meanwhile, should remember that it is not a monolithic category: there will be winners and losers.
Two clear losers already this year have been BHS, undone by what can only charitably be characterised as financial engineering, and Austin Reed.
Broadly, trading so far this year suggests that life is currently tougher at the value end of the retail spectrum. For example Bonmarché, a cheaper fashion chain for women, issued a profit warning in April. ‘Post-Christmas, trading conditions have continued to be quite challenging, with the exception of January where we saw a higher than average demand for autumn/winter sale stock,’ explained chief executive Beth Butterwick. In other words, these shoppers are only interested in bargains. Butterwick concluded that ‘consumer confidence does not appear buoyant’ and described her outlook for the rest of the year as ‘cautious’ given that ‘trading conditions will remain challenging’.
Adding to the pressure at this end of the market is a commitment made in May by Marks & Spencer’s chief executive Steve Rowe that rejuvenating its clothing range would be his ‘top priority’, notably by ‘sharpening prices’ – bad news for competitors. Margins are going to be squeezed among all the discount retailers, meaning that any sales growth may well come at the cost of lower profits.
Higher up the fashion chain, matters may not seem much better. Indeed, Burberry’s chief creative and chief executive officer Christopher Bailey warned in May that ‘we expect the challenging environment for the luxury sector to continue in the near term’.
Yet retailers here are focused more on cost cutting than on price cutting. Burberry, for instance, has embarked on a cost-cutting programme that saved over £25 million last year. That programme should deliver annualised savings of at least £100 million by 2019.
At the same time such retailers are looking to grow their top lines by enhancing their reach: Burberry has opened new flagship stores in locations including New York, Seoul, and Tokyo over the past year.
The ability of these high-end retailers to grow is underpinned by their financial health. Burberry boasts a net cash position of £660 million; SuperGroup, owner of the Superdry brand, has a net £102 million on its balance sheet.
Of course, this also speaks to their attractions as income stocks: Burberry boosted its dividend by 5% in 2015/2016 as well as announcing a share buyback policy worth up to £150 million that will start in 2016/2017; SuperGroup last year paid its first dividend in line with a new progressive dividend policy; and Ted Baker and Moss Bros hiked their 2015/2016 dividends by 18.6% and by 5.7% respectively.
When looking at UK retail stocks, then, balance sheets can be as revealing as headline growth numbers – as those exposed to BHS and Austin Reed will attest.
The Internet is revolutionising the High Street
By Adam Avigdori, co-manager of the BlackRock UK Income Fund
The pace of change in UK retail is unprecedented – and this has caught many off guard. It’s nearly all down to the internet, which has given consumers transparency regarding prices and products, and – most of all – convenience.
Consumers can now satisfy their immediate impulses at the lowest possible price. It is clear that a number of high-street giants have struggled to adapt their models quickly enough to the pace of change.
In our opinion, the fate of retailers is likely to come down to four factors:
- whether their product is replicable
- how it is priced
- the strength and relevance of their brand for consumers
- the service proposition
As these factors are connected, management teams need an effective strategy across all of these aspects to ensure future success. We think it is difficult to only compete on price in the hope that someone is not going to sell a product for cheaper – because eventually this is extremely likely to happen anyway.
The good news is that a number of companies have changed their business models to compete successfully. But in the age of Amazon and Primark, it is crucial to remain on the front foot. Whether you are a retailer at the luxury or value end of the market, there are challenges on both sides.
The luxury retailers have higher barriers to entry because they have historically enjoyed pricing power and hope to sustain it. But the consumer experience is imperative, given that visitors to these stores will not be looking for the lowest price, but will expect to receive excellent service.
Luxury brands are less affected by product transparency and more so by affordability, or rather the number of people across the world who can afford their high-end products. Likewise, these retailers must ensure their presence in countries where consumers are likely to buy their products.
On the value side, the likes of Poundland and Primark continue to play an important role on the high street. As consumers’ financial situation has improved, they are more willing to change their wardrobe, shop and enjoy leisure activities. There are more products in these areas than ever before and we have seen a proliferation of growth at the value end of the market as a result.
Primark has been at the forefront of this development. The company is able to take current trends and turn them around quickly on the high street, shortening lead times across the fashion industry.
One challenge high-street retailers face is having less flexibility than pure online retailers. For companies with products at a lower price point and gross margin, selling on the high street proves expensive due to the overheads.
The value side has a lot of interesting players in it, but is it a very fast-moving market with low barriers to entry. For this reason, we think it is dangerous to prescribe high multiples to these businesses as things can change incredibly quickly.
We don’t have any exposure at the value end of the market. If we were to invest, we would want to see a successful format on and off the high street, a management team with a solid track record, with a medium and long-term strategy in place to ensure the strength of the brand.
Much depends also on the macro environment. Ultimately, a retailer that is only present in the UK is going to struggle because the UK is a well-served and competitive market. If you can buy brands that are able to travel and establish an international presence, there is potential to make real money.
At the luxury end, we don’t like to see significant discrepancies in pricing around the world because this creates challenges. We also focus on the strength and relevance of the brand. After all, the intrinsic value of a luxury retailer is closely associated with its brand, so we need to understand how this is being managed.
The BlackRock Income fund has exposure to a luxury retailer, which is not listed in the UK and forms part of our allowance to invest in international stocks. The business has thought about how it will manage price points over the long term and there is a large family ownership, which hopefully means an alignment of interest with shareholders.
We continue to monitor opportunities across the whole of the UK retail sector, as the market tends to overreact to bad news. For example, some retailers that have good strategies in place are still penalised for having bad quarters.
In our view, UK retail is a sector of opportunity – just don’t forget to do your homework.
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