The glum outlook for general retailers is nothing new. Analysts have been downgrading their forecasts of many companies for the last 18 months. And going by the poor showing of Marks & Spencer over the Christmas trading period, it seems that things are getting more challenging for retailers. The bellwether of the retail sector has since announced that it will slash jobs and shut stores to save costs in preparation for worsening sales this year.
With unemployment on the rise and house prices still dropping, consumers are sure to rein in spending, especially at high end retailers. Heavy discounting over Christmas has nudged sales up, but margins are suffering as a result. Moreover, margins are set to come under even more pressure - especially for clothing retailers like Next and Debenhams - as higher input costs, brought about by weak sterling, take their toll.
In normal times, the way to mitigate higher input costs would be to raise prices. But that option is hardly available to retailers in the current tough climate. "Retailers with rising input costs are faced with a catch 22 situation. It is either raise prices and risk sales declines or absorb the margin dilution," points out John Stevenson, retail analyst at broker KBC Peel Hunt. He believes the earnings of retailers will see a step down after the positive Christmas trading period.
Electrical retailers have been one of the hardest hit as the recession sweeps the UK and Europe. Collapsing sales of electrical goods in Spain and Britain pushed Kesa, the owner of the UK's Comet chain, into a first-half loss. Its close competitor, DSG International, has also slipped into losses for the same reasons. DIY retailer Kingfisher, which is already seeing declining sales in China, is faced with the prospect of a slowdown in France, its biggest market. All three companies have cut their dividends.
On a positive note, as weaker retailers fall into administration, this will eliminate competition, helping better-run outfits to grab market share. That could be the case with entertainment retailer HMV, which could gain from the collapse of Woolworths and Zavvi, its main competitors.
While the current climate could pose opportunities for mergers and acquisitions, with weaker retailers being potential takeover targets, it is premature for such activity to take place. Firstly, funding remains an issue and, secondly, buyers are inclined to try to pick up assets only at fire sale prices, which could delay deals.
A close eye needs to be placed on highly indebted retailers as lower sales could lead to covenant breaches. Debenhams in particular needs to raise cash, given its unwieldy capital structure. That is going to be an uphill task in the current market. It has about £900m in net debt.
Summary of sector:
| Company | Price p | Mkt. value £m | PE ratio | Yield % | 12M price chng % | Last IC view |
|---|---|---|---|---|---|---|
| BROWN (N) GROUP | 204.25 | 560 | 9.1 | 4.5 | -17.0 | Good value, 211p, 7 October 2008 |
| BURBERRY GROUP | 230.5 | 998 | 7 | 5.2 | -59.3 | Sell, 181p, 18 November 2008 |
| CARPETRIGHT | 354 | 238 | 8 | 9.6 | -58.9 | Sell, 334, 16 December 2008 |
| CARPHONE WHSE.GP. | 95 | 868 | 12.7 | 4.6 | -72.1 | High enough, 89p, 8 December 2008 |
| DEBENHAMS | 25.5 | 223 | 2.8 | 11.8 | -68.0 | Sell, 33p, 22 October 2008 |
| DSG INTERNATIONAL | 18.5 | 328 | 3.9 | 18.5 | -82.8 | Sell, 13p, 1 December 2008 |
| DUNELM GROUP | 132 | 264 | 7.9 | 4.2 | -20.5 | Good value, 148p, 12 September 2008 |
| GAME GROUP | 127.25 | 441 | 5.6 | 3.7 | -47.0 | High enough, 196p, 30 September 2008 |
| HALFORDS GROUP | 249.5 | 523 | 8.1 | 6.2 | -19.0 | Buy, 244p, 21 November 2008 |
| HMV GROUP | 110 | 444 | 10.8 | 6.7 | -5.8 | Fairly priced, 108p, 15 December 2008 |
| HOME RETAIL GROUP | 210.5 | 1,847 | 6.6 | 7.0 | -34.3 | High enough, 189p, 22 October 2008 |
| INCHCAPE | 37.5 | 173 | 1 | 42.6 | -90.2 | High enough, 50p, 16 December 2008 |
| KESA ELECTRICALS | 89.25 | 473 | 9.2 | 6.0 | -62.0 | Sell, 89p, 16 December 2008 |
| KINGFISHER | 138.3 | 3,265 | 12.1 | 3.9 | -5.7 | Sell, 130p, 22 September 2008 |
| MARKS & SPENCER GROUP | 221 | 3,484 | 5.8 | 10.2 | -60.6 | Sell, 255p, 14 November 2008 |
| MOTHERCARE | 343 | 300 | 10.3 | 3.8 | -2.7 | Good value, 281p, 21 November 2008 |
| NEXT | 1109 | 2,186 | 6.6 | 5.0 | -33.4 | Sell, 1,159p, 5 November 2008 |
| SPORTS DIRECT INTL. | 44 | 254 | 4.6 | 8.3 | -61.2 | Sell, 39p, 17 December 2008 |
| WH SMITH | 342.5 | 537 | 9.4 | 4.2 | -0.1 | Good value, 348p, 10 October 2008 |
