FTSE 350 Review: Pockets of resilience in retail

But as recent trading updates suggest, some companies remain well-placed to get through (and even flourish) in this environment, despite pressures on consumer spending from higher food prices, energy bills and interest rates.

One way to battle wider denuded demand is to reap the benefits of a more resilient client base. Luxury watch purveyor Watches of Switzerland (WOSG) is a good example. It pointed to “the unique supply/demand dynamics of luxury watches and client registration lists” in its latest half-year results, with increases in both pricing and volumes driving its chunky revenue growth.

Other stocks, while offering products lower down the value chain, benefit from extremely strong brand equity and cultural penetration. But expansion is important, too: investors in miniature maker Games Workshop (GAW) are waiting nervously for confirmation of a signed deal with Amazon (US:AMZN), which will bring the world of Warhammer onto film and television screens. 

Downtrading, meanwhile, offers opportunities for ‘value’ operators. Discounter market leader B&M European Value Retail (BME) looks set to benefit from shoppers trading down due to cost of living pressures. The company highlighted an “excellent sell-through in key general merchandise ranges supporting improved gross margin performance” in its latest trading update. But given its existing customer base, who are in the firing line of inflationary pain, the risk to volumes can’t be ignored.  

Stifel analysts say they expect a shift in spending in favour of the discounters – as seen in the grocery sector with Aldi and Lidl – to continue in the non-food space. The investment bank thinks that B&M “is in a position to continue to deliver strong margins, cash generation and a solid dividend yield, all while growing the business both organically and through store rollout”.

Elsewhere, certain retailers who enjoyed booming revenues during the pandemic are now struggling with Covid-inflated comparatives and downgrades to forecasts. Greeting card retailer Moonpig (MOON) is such a company. 

The reversal of pandemic trends is also seen in the home improvement and electrical goods sectors. Consumers stuck twiddling their thumbs at home during lockdown splashed the cash on such items. But the outlook is now much more challenging for companies such as Kingfisher (KGF) and Currys (CURY), who have both reported weakening margins.

This is undoubtedly an uncertain time for the sector as a whole, and there is a lot of noise in the market, which can distract from fundamentals. As RBC Capital Markets analysts note, “investors should remember the early to fall, early to rise nature of the sector and also that downturns tend to lead to an increasingly polarised performance, with the stronger getting stronger”.

This is a pertinent point, and chimes with our favourite and outsider picks. Investors should still focus on companies with strong margins, balance sheets and cash flow, despite a significant amount of volatility.