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FTSE 350 Outlook: General & speciality retailers

Created:

24 January 2008

Written by:

Amanda Vermeulen

Like much of the country, the retail sector started the new year with a hangover. The difference is that most non-food retailers may continue to feel the pain while the rest of us felt rotten only for a day or two.

Last year started well - but when the Northern Rock saga erupted, previously robust consumer spending was reined in. A litany of woes has followed - higher interest rates, a slower housing market, reduced credit extension, a depressing outlook for jobs and the most recent blow - steep increases in energy bills.

The profit warnings littering the sector say the same thing: pre-Christmas trading was bad and 2008 will be challenging. The worst affected have been those that sell big-ticket items and, in some cases, the stampede out of those shares has been dramatic - Land of Leather lost a hefty 60 per cent on the day it said full-year profits would be below analyst expectations and DSG's shares continue to plunge, now at 68p from a 12-month high of 197p. Bellwether Marks and Spencer dragged the entire sector down with its worse-then-expected trading update, itself losing 20 per cent of its market value on the news. Analysts are taking a cautious line on many clothing-related stocks, earmarking the likes of Next and Debenhams as risky.

The few retailers attracting any positive sentiment include Kesa Electricals and Game , which is benefiting from strong demand for the Nintendo Wii console. Clothing retailers staving off a slump include high-end players like Mulberry and N Brown Group , which cater to an older and perhaps less credit-reliant consumer. John David , the sporting goods retailer, reported that full-year profits would exceed analysts' expectations, helped by strong same-store revenue growth of 9.3 per cent in the eight weeks to 5 January.

David Bush, head of Grant Thornton 's retail services team, says the UK retail market could be talking itself into a recession. He sees few structural reasons for retailers with good opportunities, strong cost management, appealing selling propositions and good ranges to be concerned. An example of market jitters that may well be overdone is Marks and Spencer, which is operationally sturdy. On the day of its trading update, several of its directors, including chief executive Sir Stuart Rose, laid out large sums for M&S shares. It indicates that they believe share price weakness means one thing: a buying opportunity.

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