Market is Bleak for Retail Stocks

THE WEEK: Morningstar columnist Rodney Hobson says inflation, lack of consumer demand and property rents have hit retail stocks in recent months

Rodney Hobson 23 March, 2018 | 1:46PM

Screwfix Kingfisher DIY retail stocks retailers stock market UK FTSE 100

Few months in the history of the stock market have been quite so bleak for retailers as March has proved to be. Inflationary input prices, weaker consumer demand, business rates and rising property rents have taken their toll.

Inflation is finally slowing at least, with CPI down to 2.7% after threatening to bust the 3% ceiling that the Bank of England is charged with maintaining. Average pay rises have nudged up to 2.5%, but this does mean wages are still being squeezed.

Worst of the bunch reporting this week was men’s outfitter Moss Bros (MOSB). It can’t do a lot about people deciding to hire fewer formal suits but it could have avoided stock shortages on clothing for sale. The misfortune was blamed on consolidation of the supplier base, which has ominous overtones of the disaster that saw KFG run out of chicken.

The shares dropped 23% on the update and at 45p had lost more than 60% of last May’s 120p peak. The dividend has been reduced and unless there is a dramatic upturn it will surely go soon. I fear the shares have still further to fall.

Mothercare (MTC) is in, if anything, a worse state, although we already knew that after an earlier profit warning. This week the shares actually rose 4.4% on news that it was making progress on talks with its lenders. Mind you, even that boost took the shares to only 16.5p.

Mothercare has deferred testing its financial covenants until May, which means there was no point in bothering because it was bound to fail. I have a feeling this can only get worse.

…And it is Not Just Clothing Retailers

Carpetright (CPR) is in a similar mess, having issued three profit warnings in four months. It now proposes a company voluntary arrangement, an admission that it is insolvent. It will close an unspecified but significant number of stores and attempt to force rent reductions on landlords.

There will almost certainly be a fund raising from shareholders. I cannot see any merit in throwing good money after bad. It is not too late for shareholders to get out and cut their losses. Better to extract a pittance than cough up more.

DIY chain Kingfisher (KGF) does have its good points, though its figures are always a mixed bag. Full year results were solid if unspectacular. Once again, they were rescued by outperformance at the Screwfix trade outlets, while B&Q suffered because consumers shunned big ticket items such as new kitchens and bathrooms and the French outlets Castorama and Brico Depot continued to weaken.

The shares slumped 10.6% and slipped further the following morning to stand just above the 12-month low. I suspect they will fall through this previous support point as investors fret over whether the five year transformation programme will lead to genuine improvement.

Like Moss Bros, Kingfisher managed to run out of some key items such as paint brushes. It worries me when management concentrate on the grand strategy and take their eye off the basics.

You might have thought Next (NXT) had bucked the trend when its shares shot up over 4% on full year results. However, the company admitted it had been through the worst 12 months in the past 25 years and that the next 12 months will show only modest improvement. I cannot see any reason to consider buying the shares.

A Retailer Worth Backing?

There are, however, almost always exceptions and sometimes the exceptions get unfairly swamped by the tidal wave of the whole sector. I cannot for the life of me understand why Ted Baker (TED) fell 7% on excellent full year results that included a 12% rise in the dividend. It is true that Baker mentioned difficult trading conditions but if you can produce a double digit increase in sales and profits in tough times, that surely is a sign of a well-run company.

The shares are now back to where they were a year ago. If you want to buy a retail stock and despair at the rest, do take a look at Ted Baker. You could certainly do much worse.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Carpetright PLC16.74 GBX-3.66-
Kingfisher PLC246.00 GBX0.41
Moss Bros Group PLC31.00 GBX-2.36-
Mothercare PLC16.66 GBX-2.00-
Next PLC5,130.00 GBX-0.62-
Ted Baker PLC1,724.00 GBX-2.21-

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.