After more than two years of high double-digit share price growth, many investors must have wondered whether 2014 would signal an end to the good times for clothing retailers. After all, keeping such lofty valuations afloat increasingly required superior earnings growth at a time when consumers continued to spend cautiously as inflation outstripped real wage growth. So delivering a consistently robust performance proved tricky last year and the sector saw its share of profit warnings. That led to a general derating during 2014, a sharp uptick in volatility and widely varying performances between stocks.
A good example is SuperGroup (SGP), a longstanding buy tip (1,175p, 15 Aug 2013) which turned sour after two quarters of mild like-for-like retail sales declines. It didn't seem to matter that margins improved and profit still rose in the double-digits. Plus-sized clothing retailer N Brown (BWNG) suffered the same fate, despite reporting sales growth and unveiling a strategy focused on moving the growth profile up a notch.
Indeed, markets overreacted to the slightest whiff of weak sales across the sector and that diminished confidence also spread to stocks that had previously outperformed. Take Ted Baker (TED), for example. Its shares drifted downwards, despite the company consistently reporting quarterly like-for-like sales growth and good progress with its overseas expansion programme. Sports Direct (SPD) and JD Sports (JD.) were also affected by sentiment despite meeting, or even exceeding, profit forecasts.
That said, some retailers did suffer with genuine structural issues. Debenhams (DEB), for instance, had to announce a new strategy - and appoint a new finance director - as well as launch a major debt refinancing in an effort to improve performance. Marks and Spencer (MKS) also continued to struggle as sales of general merchandise remained in decline. Things got worse later in the year, too, as a balmy autumn made it nigh on impossible for retailers to sell jumpers and coats, prompting many to warn on profits. SuperGroup issued a profit warning in October, N Brown followed suit, and even the mighty Next (NXT) had issued a mild profit warning by the end of the year. Debenhams and M&S were equally affected.
The good news, however, is that sentiment improved in the final few months of the year, with shares in many of the sector's companies gaining lost ground following better-than-expected Christmas trading. So, after 2014's derating, prospects are looking more upbeat for clothing stocks. Inflation has hit a record low as food and oil prices have plummeted, which could drive more consumer spending on discretionary goods, such as clothing and apparel. But uncertainty in the run-up to the general election may yet drag on sentiment, as could the prospect of rising interest rates. Accordingly, smart stockpicking remains key and we favour quality and compelling self-help stories.
| Company name* | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC view |
| N Brown Group | 423 | 1,199 | 15.7 | 3.4 | -23.9 | Hold, 296p, 13 Oct 2014 |
| JD Sports Fashion | 488 | 950 | 14.2 | 1.4 | 18.2 | Hold, 425p, 18 Sep 2014 |
| Next | 7,055 | 10,785 | 17.8 | 2.0 | 11.4 | Hold, 6,400p, 30 Oct 2014 |
| Sports Direct International | 717 | 4,288 | 21.1 | 0.0 | 0.4 | Buy, 661p, 12 Dec 2014 |
| Burberry Group | 1,743 | 7,749 | 23.6 | 1.9 | 15.1 | Hold, 1,512p, 12 Nov 2014 |
| Supergroup | 975 | 790 | 18.2 | 0.0 | -37.5 | Buy, 806p, 15 Dec 2014 |
| Ted Baker | 2,377 | 1,044 | 32.6 | 1.5 | 11.7 | Buy, 2,147p, 28 Nov 2014 |
| Jimmy Choo | 167 | 651 | NA | 0.0 | NA | NA |
| Debenhams | 73 | 890 | 9.8 | 4.7 | -10.1 | Hold, 65p, 24 Oct 2014 |
| Marks and Spencer Group | 473 | 7,733 | 14.7 | 3.6 | -1.9 | Sell, 439p, 5 Nov 2014 |
| *Combines LSE classified general retailers and personal goods sectors | ||||||
Favourites
Ted Baker's shares have always been pricey, but it's a price worth paying for quality. There's plenty of potential for SuperGroup to grow overseas, too, and it's also capable of delivering consistent double-digit growth over the long term. N Brown had a tough autumn, but trading has since picked up and the slowdown appears to have been genuinely weather-related. Despite the antics of Sports Direct's founder and chairman, Mike Ashley - who owns a controlling stake and uses the group as a vehicle for complicated option arrangements relating to shares in other companies - prospects look good. Indeed, it returned to our buy list a few months back on valuation grounds and because it consistently hits forecasts and boasts strong overseas expansion opportunities.
Outsiders
Marks and Spencer will continue to struggle until the general merchandise division recovers. Online distribution troubles over Christmas were alarming and chief executive Marc Bolland's days look numbered.
