By Trevor Green, director and head of UK institutional equities, Aviva Investors
The general retail sector has outperformed the broader UK stock market this year. But in the actual marketplace, this has been a tough year and a succession of high-profile retail chains have gone bust. Blacks Leisure, Peacocks and Game Group, among others, have fallen into administration. Although these three formats have since been salvaged in one way or another, their store bases have been drastically reduced. However, the simple economics of supply and demand suggests the remaining survivors should have an easier time ahead.
Comet passes
There are a variety of reasons why retailers are struggling. It might be due to long-term structural headwinds, such as the internet making store-based models less profitable or it could be a tough consumer spending environment, or both. Interestingly, the week Comet announced it was on the brink of going into administration, customers flocked to its shops in anticipation of bagging a bargain. Clearly, for many an attractive price point trumps brand longevity. While the queues were forming at Comet, shares in Dixons Retail shot up 25%* in anticipation that a key competitor was exiting the marketplace. But both companies operate in a highly competitive environment and the online threat is intensifying. Shares in HMV rallied to 140p in February 2009*, as it was perceived to be a beneficiary of the demise of Zavvi and Woolworths. However, online retailers proved the real winners following Zavvi and Woolworths’ collapse and at the time of writing, HMV shares are languishing at 2.75p*. The lesson is that supply coming out of the marketplace can be good news provided you have backed the beneficiary. Prêt-à-Portas Mary Portas, the government’s retail tsar, has championed the High Street and urged the government to impose strict restrictions on new out-of-town retail developments. The government responded with a watered-down “town centre first” policy which, given the extent of shop closures year to date, has failed to make a meaningful impact. My worry is that even Portas’s good intentions can only slow, not reverse, the decline of the town centre. As a manager, my aim is to target retailers which have either a clear franchise advantage or a blend of online, outof- town and selective High Street outlets. On a brighter note, according to the latest CBI survey, which covers the first half of October, retail sales have picked up and shop owners expect the rebound to continue in the run-up to Christmas. Employment has been rising, and inflation falling, leading to an improvement in household disposable incomes. Furthermore, compensation payments for mis-sold Payment Protection Insurance (PPI) could alleviate some of the pressure on household finances. The payback bill has passed the £10bn mark*. If just 20-30% of these payments are spent, rather than saved, this would be a significant shot-in-the-arm for retail sales. Sometimes investing in the retail sector on a short-term basis can be as straightforward as finding stocks with the easiest comparisons and looking for the share prices to appreciate on improving likefor- like reported sales. After record rainfall in April, June and July, companies will go into next summer with easy comparisons and their fingers crossed for better weather. One such company is Kingfisher, which owns B&Q, the UK DIY chain. Last summer, barbeques and higher-margin garden furniture gathered dust while sales of lower margin paint surpassed expectations. However, the outlook is more complicated for Kingfisher, which owns the Castorama and Brico Dépôt chains in France, which together account for about 50% of group profit. With French consumer confidence falling to its lowest level in nine months in October, the outlook is more challenging although the weather there should be less of a problem. * Source: FT.com
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