26th November 2015
As the US shopping craze of Black Friday hits the UK for the second consecutive year Ian Forrest, investment research analyst at The Share Centre, shares his views on the retail sector…
Retailers will be hoping that Black Friday will put a spark back in their sales, following a challenging year for many. Food & Drug retailers have been under intense pressure from discounters and have subsequently seen their combined revenues climb at a snail’s pace, just 0.5% in the last year.
This anaemic growth has even come at the expense of margins, with pre-tax profits swinging from a combined £3bn profit a year ago, to a £6.9bn loss.
Contrastingly, general retailers have seen a much stronger performance with the likes of Dixons Carphone and Sports Direct benefitting substantially from rising consumer spending. Sales have climbed by 11.3% in the last year and earnings have experienced brisker growth, suggesting margins are widening, with pre-tax profits rising by 13.4%. General retailers may therefore see Black Friday sales as the icing on the cake.
For investors looking for exposure to the sector, we recommend Marks and Spencer, Dixons Carphone and Findel.
British retailer Marks and Spencer continues to see growth within the food business and despite a slight drop in general merchandise, margins continue to beat expectations. Online sales continue to rise, with a 20% increase in traffic driven by more consumers shopping on tablets and mobile phones. The latter can only mean that Black Friday and the festive season has the potential to boost sales further and enrich performance.
“We currently recommend Marks and Spencer as a ‘buy’ due to the strength of the growing food business, the significant potential to increase profitability in general merchandise, rising disposable incomes and the healthy dividend. The lower oil price, along with a growing UK economy, should all be supportive of results ahead.
Dixons Carphone is one of Europe’s largest consumer electrical and mobile telecoms retailers, and is a company that we’ve had on our ‘buy’ list for nearly a year. The first full year results for the combined group, announced in July, showed like-for-like revenues up 6% while pre-tax profits increased by 21% to £381m, slightly ahead of expectations.
The latest update in September reported a similar trend with like-for-like sales rising in the UK by 10% in the first quarter, helped by increased mobile phone sales. The launch of the latest Apple iPhone will surely make it to the top of a few Christmas lists, so the group will be hoping this boosts sales further.
At present, we recommend Dixons Carphone as a ‘buy’ for medium risk investors seeking both growth and income due to the strong sales growth, the potential boost to retailers from the fall in the oil price and the benefits of scale provided by the merger. Analysts have been raising their expectations rapidly since the merger and with the company outperforming, this trend may well continue.
General retailer Findel sells a wide range of products via catalogues supplied to homes and schools. These include textiles and bedding, electrical, furniture, nursery products, gifts, and greeting cards. Investors may be aware that the group has experienced a mixed trading performance with a strong performance by the Express Gifts division offset by problems in other divisions.
Recent interim results showed sales in the first half down slightly at £191.4m but pre-tax profits remained level at £3.4m. Express Gifts underperformed slightly in the first six months but there were signs of recovery in the struggling Education division and Findel said it expects full-year profits to grow overall.
Investors may be aware that in September, the company announced that it had received an offer for Kitbag from an unnamed third party and expected the sale to go through subject to contract. It also revealed that Sports Direct had taken a 19% stake in the company having bought out the two largest institutional shareholders.
With such companies benefitting substantially from rising consumer spending, it can only mean good news for Findel. While a lot of work has been done to stabilise the group, there is still a lot more to do. Despite this, we recommend it as a ‘buy’ due to the potential for further growth at the Express Gifts business and the possible resumption of dividends.