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Top-line success over the Christmas
period has come at a price
Sector recovery looks premature given
very strong consumer headwind
Several upgrades to Neutral (V); sector
bounce leads some target prices up
The UK general retail sector has enjoyed a good run since
Christmas and, indeed, since its mid-year lows. There has
been a shift in sentiment, with stocks marked up after trading
statements – if these have not resulted in downgrades for
the current year.
However, we reckon this enthusiasm is a little premature as we
cannot recall a time when retailers have been less certain about
their commercial outlook. This is perfectly understandable:
economists, equity strategists and analysts feel the same way.
Initial reports indicate that, at least for the stronger brands in the
UK marketplace, the Christmas trading season was not a
disaster – at least on the top line – and the leaders have emerged
with clean stocks. Yet this has come at significant cost to
margins and we see this relatively last-minute splurge as the last
hurrah of debt-fed spending by the UK consumer, profligate for
too long. Rising unemployment is only now beginning to seep
into public consciousness. Combined with a shortage of credit
and a growing awareness of the dangers of excessive personal
leverage, we still believe Joe & Jane Public will modify their
spending habits a lot more. The other pertinent issue is, of
course, the damage that the collapse of sterling will wreak on
the sector’s margins. For the most part, this will not have an
impact until H2 2009. But with retailers themselves uncertain of
its full financial impact, we very much doubt the full effect is
factored into market expectations.
For these reasons, we believe the sector bounce is premature
and we have made some significant forecast downgrades.
We have upgraded WH Smith (target raised to 375p), Next
(up to 1,170p) and DSGi (cut to 21p) to Neutral (V), on
specific valuation grounds, and downgraded Inditex to
Neutral (V) (TP raised to EUR35) after a good run
(preferring H&M (Neutral (V); TP cut to EUR310) short
term). We have downgraded Kingfisher to Underweight (V)
(TP up to 125p), as we think its recovery looks premature;
we believe its next territory to disappoint could be Poland.
Investment summary 3
So how bad was it? 7
H&M 10
Inditex 14
DSGi 17
HMV 20
Home Retail 25
Kesa 28
Kingfisher 31
Marks & Spencer 34
Next 38
WH Smith 41
Disclosure appendix 45
Disclaimer 48
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