Should investors shop around for retailers?

Retailers are certainly going through a torrid time. Not only are they facing rising costs and labour shortages, but their customers are also under financial pressure as the rising costs of living mean they have less money to spend.

But what does this mean for investors? Is now the time to consider buying into companies in this sector whose share prices have been adversely affected?

Here we take a look at the prospects for retailers – and highlight a few investment funds that are still putting their money into the sector.

Slowing sales growth

The latest KPMG/British Retail Consortium Retail Sales Barometer revealed slower sales growth in March 2021. BRC chief executive Helen Dickinson, OBE, said the rising cost of living and the ongoing war in Ukraine had shaken consumer confidence. “Expectations of people’s personal finances over the next 12 months (are) reaching depths not seen since the 2008 financial crisis,” she said. “Furthermore, households are yet to feel the full impact of the recent rise in energy prices and national insurance changes.”

She also highlighted the potential for further supply chain disruption, with China putting key manufacturing and port cities into lockdown. “Ultimately, consumers face an enormous challenge this year, and this is likely to be reflected in retail spend in the future,” she added.

Industry profit warnings

UK-listed retailers issued nine profit warnings in the first quarter 2022 – the highest quarterly total since the start of the pandemic, according to the latest EY Parthenon data.

Perhaps more worryingly, the report reveals that one-third of FTSE Retailers (34%) have issued a warning in the last 12 months. It also stated that 67% of retail warnings cited supply chain disruption, 75% blamed increased costs, and more than half (56%) revealed staffing issues in the last six months.

Outlook for retailers

Don Williams, partner in the retail sector for KPMG in the UK, believes household budgets may come under pressure from rising costs, an increasing tax burden and competition from foreign holidays.

“This is leading to significant concern for many on what this will mean for consumer confidence and especially what impact that will have on discretionary spend categories,” he said.

He also pointed out that “retailers face walking a tightrope between absorbing rising costs themselves or passing these costs on to consumers at a time when competition for share of a shrinking wallet is going to be increasingly fierce.” Looking ahead, he believes the best retailers will continue to be able to balance self-help measures with sharp attention on areas that can yield cost and efficiency gains.

There are still opportunities

An analysis of the largest stock positions in many UK investment funds shows a distinct lack of enthusiasm for the retail sector.

However, there are always some opportunities. For example, the latest update from the Liontrust UK Micro Cap fund highlighted opportunities. It noted how the volatile macroeconomic environment resulted in investor nervousness, with earnings ‘misses’ and other disappointments met with exaggerated share price reactions.

One such victim has been musicMagpie, the consumer technology, books and disc media recommerce specialist. “It (musicMagpie) is aiming to supplement its long-term expansion via a new rental subscription service,” it stated. “The new service allows consumers to rent refurbished technology products such as games consoles and tablets.”

Sid Chand Lall, manager of IFSL Marlborough Multi Cap Income fund, noted the share price recovery of Cake Box, the franchise cake retailer. “It responded well after an update about remedial measures responding to criticisms in a blog – the biggest change being the appointment of a new CFO,” he said. “However, we believe the company still has more ground to recover.” The issues related to some errors noted in the company’s annual report by a retail investor blogger that caused the stock price to fall back in January 2022.

Of course, you can get exposure to retail in several ways. For example, one of the largest holdings in the TM Tellworth UK Smaller Companies fund is Inspecs Group*. The eyewear designer and manufacturer sells its products in more than 70,000 optical and retail outlets across 80 countries. These range from high street chains to independent outlets. In addition, one of the top contributors to recent fund performance has been Card Factory, the retail greetings card business*.

And then there’s the buildings themselves. Marcus Phayre-Mudge, manager of BMO European Real Estate Securities, says that there has been a 50%-60% drop in the absolute value of UK shopping centres. “They were anchored by department stores, which are a broken concept,” he said. “They were getting to a point where they were starting to look interesting again but are now overwhelmed by the anticipation of a consumer slowdown. The energy crisis and increase in mortgage costs will put a dampener on consumer expenditure for a while to come.

“I’m more optimistic about continental Europe,” he continued, “Europeans tend to rent rather than own and have a bigger social safety net. For example, the energy cost increase has been capped in France. I’m also more positive about retail warehousing – the third leg for retailers and the omnichannel sales process. This area is still experiencing good sales and rental support.”

*Source: fund factsheet, 30 April 2022