Shop Stocks for Big Profits

The British high street offers little to stock picking investors, but across the pond there are plenty of retailers offering growth and income to discerning customers

Emma Wall 27 March, 2014 | 4:27PM
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How many retail stocks do you own? Aside from Next (NXT), whose share price has climbed 445% over the past five years, the British high street offers little to the UK investor.

Over the past decade, many high street staples have gone under – victims of the recession and the boom in online shopping. Listed companies such as JJB Sports, Game, Clinton Cards, HMV and Woolworths bit the dust. Our supermarkets still offer investors an opportunity to buy, but for real exposure consumer spending you have to look outside of the UK.

“One of the great things about investing in America is I can walk up the high street, see first-hand how companies are doing, and if I wanted to I could buy the shares of almost every big brands I walk past,” said Felix Wintle, manager of the Neptune US Opportunities fund.

Wintle, whose Morningstar analyst Bronze Rated fund returned more than 35% last year, has a point. Macy’s (M), Abercombie & Fitch (ANF), Gap (GPS), Urban Outfitters (URBN), Tiffany & Co (TIF) are all listed on the New York stock exchange, among many others. And according to Morningstar equity analysts, many retail stocks are undervalued too.

Retailers were hit hard in the global recession, but the steadily improving US economy has led to increased levels of employment and – more recently – wage growth too. The recent slip in economic data has been blamed on unprecedented bad weather, and consumer spending is expected to bounce back now that the snow has melted. Inflation is low too, with the fall in fuel prices acting as an effective tax cut for US households.

Speaking at an analyst roadshow in San Francisco, Rebecca Edelman, manager of the Neptune US Income fund, said that while the US consumer was spending again, their habits had changed since the downturn.

“The US consumer is more focused on value now,” she said. “They are more discerning. It is not all about shopping at the dollar store, but making sure you get a good deal and a product that is differentiated.”

In a market where Amazon (AMZN) can offer most products a significant discount you can see why consumers are not prepared to pay more than they have to. Retailers are having to change their strategy, and are using ‘big data’ to reward their customers with more of what they want.

Clothing store Nordstrom (JWN) has found that loyal customers shop twice as often and spend up to three times as much, and 14% of Starbucks (SBUX) customers pay with their mobile app. If companies can use this data to improve the customer experience that will translate into profits for shareholders.

“Companies are having to rethink their approach,” said Edelman. “It is no longer effective to use your company’s size to dominate a market. But if they can harness this data and get their products speak to directly consumers, the potential is very exciting.”

What About the UK?

If patriotism is holding you back from taking the leap across the pond, this week’s poor retail sales results should assuage your doubts. Internet sales and food sales ticked upwards, but retail sales continue to be volatile, and Jeremy Cook, chief economist at World First said further disappointment is to come.

“Robert Chote, head of the Office of Budgetary Responsibility, said yesterday that the strength of the UK economy will slow later this year, because it has been driven by consumers dipping into their savings. And while wage settlements are starting to move higher, we doubt that the shortfall will be made up soon,” he said.

“Heavy discounting in February may have allowed some strength to this number, but we will see high street profitability take a hit either from sales falling or from margins being squeezed further.”

3 Undervalued US Retail Stocks

Coach (COH)

Coach is a manufacturer, distributor, and retailer of handbags and accessories, and is expanding to broader product categories. Its products offer the quality of higher luxury brands but at more attractive price points. Although about 60% of sales come from its more than 550 North American retail stores, Coach also sells its products through department stores, international shops, the internet, its catalogue, and Coach stores in Japan and China. Coach recently started establishing European distribution, with 20 stores acquired in 2014.

eBay (EBAY)

EBay provides an online trading platform in more than 40 markets of various sizes across several product categories. With $83 billion in global gross merchandise volume in 2013, eBay facilitated 8% of the $1 trillion-plus global e-commerce market. PayPal's net total payment volume was $180 billion in 2013.

Urban Outfitters (URBN)

Urban Outfitters is a specialty retailer that operates the Urban Outfitters, Anthropologie, Free People, Terrain, and BHLDN brands. It operates a wholesale segment under the Free People brand, which is distributed to 1,400 stores. The firm has more than 40 years of experience creating and managing retail stores that offer differentiated collections of fashion apparel, accessories, and home goods in a unique store environment that establishes an emotional bond with the customer.

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.

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Emma Wall  is former Senior International Editor for Morningstar

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