How customers interact with the UK high street is still evolving. With the advent of discount retailing, online shopping and click-and-collect, traditional general retailers are being forced to change the way they do business. 'General retail' is a tricky term because it encompasses different kinds of businesses, from motor retailers to stationery and even funeral directors. Each business has its own cycle, and some are faring better than others as we take this snapshot.
Motor retailers still find themselves in a market 'sweet spot'. Lookers' (LOOK) shares are up 13 per cent year on year, with the group harnessing its strong balance sheet to remain acquisitive in a market ripe for consolidation. The group was able to negotiate new lending facilities with its banks last year, which allowed it to purchase Addison Motors for nearly £90m. Addison, which trades as Benfield Motor Group, is expected to boost Lookers' annualised sales by around 20 per cent and give an immediate lift to earnings.
Other members of the general retail sector aren't finding themselves in such an upward cycle. Discount retailers are struggling compared with their German cousins in food retailing, who continue to steal market share from British middle-market rivals. Maybe that's because food is food, but quality still speaks where homewares, clothing and general merchandise are concerned.
When Poundland (PLND) joined the London market, investors took it as a sign that discount retailing was well and truly in ascendance. But it seems trading across the existing business is slowing and its recent acquisition of rival group 99p Stores hasn't been the quality deal analysts first thought. The company is beginning 2016 under a cloud of doubt.
Faring better is discount chain B&M European Value Retail (BM.). The company spooked investors towards the end of last year with sluggish figures in the run-up to Christmas. However, a recent update from the company showed positive momentum over the festive period itself, putting the market's fears to rest for now.
The coming year could also see a number of break-ups and make-ups in this space, too. General retailers are under intense pressure to realise the value of their parts through sell-offs, a prime example being Home Retail (HOME). The company is to sell its Homebase brand to an Australian buyer for £340m, while Sainsbury's (SBRY) continues to hammer out a deal to take over its remaining business, centred on Argos. Similarly, speculation is mounting over the future for Kingfisher (KGF), currently owner of DIY business B&Q and the growing Screwfix. During the third quarter, Screwfix's like-for-like sales grew 13.3 per cent compared with B&Q's sales, which were up just 2.4 per cent on the same basis. Kingfisher also owns a business in France, but with rival Darty (DRTY) receiving a takeover bid last year, its days could also be numbered.
Ultimately, the legacy retailers in this space face the biggest challenge of all. Debenhams (DEB) and Marks and Spencer (MKS) are both due to make important senior management changes this year in the hope of rejuvenating trading, while WH Smith (SMWH) is focusing on growing its travel-based business to lessen its dependence on dwindling high-street footfall. For retailers such as Debenhams and Marks and Spencer, product quality and pricing are king, and the coming year will be an important test to see if the new chief executives understand this. A new Debenhams chief has yet to be announced, but Steve Rowe - who is taking the reins from Marc Bolland at M&S - is well-regarded by investors as a 'true trader'. Mr Rowe started his career with the company more than 20 years ago as a Saturday boy and his effective management of the group's food division has been widely praised.
Looking ahead, all retailers will be forced to absorb the new living wage this year. As a result, some retailers could face a significant increase in their cost base, and will be forced to compensate with price hikes to offset the higher charges. However, the new legislation could also lead to improved consumer spending, as customers enjoy more disposable income.
| Company name | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC view |
| AO World | 145 | 611 | NA | 0 | -45.7 | Sell, 160p, 24 Nov 2015 |
| B&M European Value Retail | 273 | 2,734 | 23.8 | 1.5 | -8.9 | Hold, 308p, 18 Nov 2015 |
| Card Factory | 335 | 1,141 | 18.4 | 2.5 | 23.1 | Buy, 355p, 22 Sep 2015 |
| Debenhams | 76 | 937 | 10 | 4.5 | 6 | Buy, 85p, 23 Oct 2015 |
| DFS Furniture | 324 | 690 | 14.5 | 2.9 | NA | Buy, 313p, 9 Oct 2015 |
| Dignity | 2,259 | 1,116 | 19.9 | 0.9 | 24.7 | Hold, 2,458p, 29 Jul 2015 |
| Dixons Carphone | 450 | 5,176 | 16.4 | 2.1 | 0.7 | Buy, 487p, 16 Dec 2015 |
| Dunelm | 858 | 1,737 | 18.1 | 2.5 | 7.8 | Hold, 867p, 13 Jan 2016 |
| Halfords | 327 | 650 | 10 | 5.1 | -24.8 | Buy, 389p, 13 Nov 2015 |
| Home Retail | 149 | 1,212 | 14.2 | 2.6 | -26.1 | Hold, 130p, 21 Oct 2015 |
| Inchcape | 721 | 3,143 | 14.9 | 2.9 | 2.9 | Hold, 806p, 2 Aug 2015 |
| Kingfisher | 334 | 7,660 | 15.7 | 3.2 | 1.8 | Hold, 354p, 16 Sep 2015 |
| Lookers | 165 | 653 | 13.2 | 1.8 | 13.9 | Buy, 180p, 8 Sep 2015 |
| Marks and Spencer | 422 | 6,855 | 12.5 | 4.4 | -9 | Buy, 436p, 7 Jan 2016 |
| Pets at Home | 233 | 1,166 | 16.2 | 2.7 | 15.7 | Buy, 276p, 25 Nov 2015 |
| Poundland | 148 | 398 | 11.8 | 3.5 | -57.9 | Sell, 171p, 14 Jan 2016 |
| Saga | 201 | 2,248 | 16 | 3.1 | 21.6 | Hold, 208p, 30 Sep 2015 |
| WH Smith | 1,588 | 1,820 | 18.2 | 2.5 | 19.4 | Hold, 1,630p, 15 Oct 2015 |
Favourites
Our favourites are defined by three important measures: low levels of competition, strong brand and effective management. For us, that means electricals retailer Dixons Carphone (DC.), Marks and Spencer and Pets at Home (PETS) are our top picks. If it's shareholder returns you're after, Card Factory (CARD) is feeling especially generous of late, and we're also optimistic that cycling and motor specialist Halfords (HAL) will be able to recapture some of its lost momentum this year.
Outsiders
The discount retailers don't look like a safe bet to us these days, particularly Poundland where concern is mounting over the 99p Stores deal and sluggish trading across the existing business. Debenhams' Christmas trading was better than expected, but we reckon it's going to have to find a stellar leader to reignite the market's faith in the middle-market department store model. Other outsiders include white goods retailer AO World (AO.) and legacy motor retailer Inchcape (INCH). Shares there are flat year on year despite favourable market conditions.
