The general retailers are a mixed bag, and the four that performed best in 2019 – Pets at Home (PETS), Dunelm (DNLM), Games Workshop (GAW) and WH Smith (SMWH) – all did well for very different reasons. The latter three are all active buy tips, and as 2020 unfolds we will be watching closely to see whether they can maintain their impressive records of the past year.
Dunelm has seemingly side-stepped the malaise in UK physical retail, and looks set to boost its growth with the help of a new digital platform, which allows its e-commerce site to load faster and handle more traffic. WH Smith is betting on its ability to grow in the US, with the massive acquisition of Marshall Retail Group, which will double the size of its international travel business. There’s plenty of room for optimism given the success of its earlier InMotion acquisition, but with the $400m (£305m) deal valuing Marshall at 13.7 times cash profits, there isn’t much room for error.
Cineworld (CINE) is also making a big bet on North America, but the risks here look considerably higher. The cinema operator’s debt pile was already well in excess of its market capitalisation from its deal to buy cinema chain Regal in the US in February 2018, then in December it announced plans to borrow a further £2.3bn – just shy of its market capitalisation again – to buy Canadian group Cineplex for C$2.8bn (£1.6bn). The deal will create the largest cinema operator in North America, but with management already warning that trading will be shy of previous expectations in its upcoming results, the company will need to demonstrate it can pull off the integration process. Many are already betting it can’t, and short positions against the group have climbed precipitously since June, making it now the second most-shorted UK-listed company, according to Financial Conduct Authority data.
Games Workshop’s strategy of engaging with its community of die-hard fans has yielded repeated record sales and profit performances, but the combination of a press-shy management team and somewhat unique proposition make it difficult to judge just how big the group could be. We suspect that in the coming year growth will continue to come from trade and retail sales, rather than growth in the royalties from licensing its intellectual property, although the proliferation of streaming platforms – and the competition for content that inevitably follows – could make for a nice additional boost.
We turned bearish on Trainline (TRN) in November, based on what we see as a precarious competitive position. Since then, the group has reported strong sales growth, but we have seen little as yet to show it can prevent competitors from cannibalising its business model. Indeed, Rail Review chair Keith Williams has called for the rail companies to be more “collaborative”. If they heed his request, Trainline could see itself sidelined.
Dixons Carphone (DC.) and B&M European Value Retail’s (BME) Christmas results were both indicative of the challenges on the high street. Both groups reported like-for-likes flat or nearly flat, at 0 per cent and 0.3 per cent, respectively. Dixons has been working to grow its online business with some success, but was slow to respond to the shift to sim-only and variable mobile phone contracts. However, the group’s new mobile phone offering should be launched in the coming financial year, which starts in April. Impairments in the mobile division added up to £557m in the year to April 2019, so a compelling proposition here will be crucial for the group’s future growth.
NAME | Price (p) | Market cap (£m) | 12-month (%) | Fwd PE | Yield (%) | Last IC View |
B&M European Value Retail | 376 | 3,762 | 16.00% | 17 | 2.00% | Hold, 356p, 12 Nov 2019 |
Cineworld | 188 | 2,574 | -29.20% | 9 | 7.40% | Sell, 207, 16 Dec 2019 |
Dixons Carphone | 150 | 1,743 | 4.10% | 10 | 4.50% | Sell, 141p, 13 Dec 2019 |
Dunelm Group | 1,125 | 2,272 | 59.40% | 21 | 2.50% | Buy, 1,082p, 16 Jan 2020 |
Games Workshop | 6,805 | 2,224 | 123.10% | 29 | 1.80% | Buy, 6,675, 14 Jan 2020 |
Inchcape | 688 | 2,741 | 17.90% | 12 | 3.90% | Hold, 585p, 26 Jul 2019 |
Just Eat | 887 | 6,032 | 35.90% | 78 | - | Hold, 890p, 13 Jan 2020 |
Kingfisher | 213 | 4,471 | -4.50% | 10 | 5.10% | Hold, 195p, 20 Nov 2019 |
Moneysupermarket.com | 328 | 1,761 | 10.50% | 17 | 3.40% | Buy, 350p, 17 Oct 2019 |
Pets at Home | 290 | 1,450 | 101.90% | 20 | 2.60% | Hold, 248p, 27 Nov 2019 |
Trainline | 507 | 2,437 | 0.00% | 54 | - | Sell, 436p, 28 Nov 2019 |
Vivo Energy | 115 | 1,387 | -15.50% | 12 | 1.60% | Hold, 117p, 05 Aug 2019 |
Watches of Switzerland Group | 375 | 898 | 0.00% | 18 | - | Hold, 325p, 10 Dec 2019 |
WH Smith | 2,520 | 2,892 | 28.90% | 21 | 2.30% | Buy, 2,388p, 12 Dec 2019 |