Superyachts, hot weather and high valuations show it’s tough being a retailer (even a really successful one)

It’s not as if much further evidence was needed, but today shows just how tough it is to be a retailer in the current environment of low wage growth, high debts and brittle consumer confidence,

DFS has coughed up a profit warning, Dunelm’s trading update lived down to the low expectations set by May’s disappointing update to leave its shares at a six-year low and even superyacht supply and maintenance expert GYG has seen its shares sink without trace today, falling by more than a third.

DFS cited hot weather as a problem (besides shipping and supply chain issues) while tough trading at Dunelm again raises the issue of whether consumers are simply at ‘peak stuff’ and are preferring to spend their cash on experiences and not materials goods, an issue addressed more than one by Next’s boss, Lord Wolfson.

GYG rather looks like one of those stocks that comes out near the top of an economic – and stock market – cycle, rather like one of its predecessors in the luxury boating field, Raymarine – and at least B&M European Retail is doing a fine job fulfilling more essential, day-to-day needs for its customers.

However, even its shares have yawned in the face of a bumper quarter for the company, when sales rose by 21%, although like-for-like growth of just 1.6% year-on-year in the UK stores may be tempering investor’s enthusiasm a little, especially when the stock trades on nearly 20 times earnings with a dividend yield of 2%.

Those numbers represent a big premium (on earnings) and a big discount (on the dividend) relative to the wider UK stock market and this shows what a tricky sector retail is for investors right now.

Retail sector review

There are 50 Main Market and AIM-quoted retailers and between them they are valued at £68 billion – enough to given them an overall price/earnings ratio of just under 14 times (based on aggregate consensus analysts’ forecasts for 2018) and a dividend yield of 2.5%.

Those firms who look to have got it ‘right’ – with their brand, product, price points, multi-channel route to market (or all of the above) – trade at big earnings multiples and a premium to the retailers sector and indeed the overall UK market.

Source: Digital Look, Consensus analysts’ forecasts

This suggests that at least some of their future success is already priced in and that can open up downside risk – as we can see in ASOS shares today.

Most retailers would be thrilled with 22% revenue growth in the four months to June 2018 and shareholders in many firms would welcome an unchanged full-year sales growth forecast of 25% to 30% year-on-year with no undue signs of margin pressure or further upward revision or costs or capital investment forecasts.

Yet ASOS shares are being hammered because the stock trades on nearly 60 times forward earnings and investors are looking for upward momentum in earnings forecasts, not unchanged ones, to help justify such a premium rating.

This does not mean ASOS has suddenly become a bad or disappointing company – although the spring upgrade to the next three years’ capital investment plans may raise questions in some investors’ minds about how much cash is required to continue to scale up the business.

It may therefore be hard for investors to find ‘value,’ from a strictly share price perspective, among the retailers who are succeeding, even in these straitened times.

The second problem for investors picking over what’s on the shelf in the sector is that there seems to be precious little momentum in profits to act as a catalyst at stocks where there could be value to be had, at least judging by lowly earnings multiples and fat dividend yields.

Source: Digital Look, Consensus analysts’ forecasts

Many of these names have already dished out profit warnings, dividend cuts or both and investors will need to tread warily if they are to find a successful turnaround story here, rather than a value trap which looks cheap because it deserves to be.

M&S catches the eye here as Archie Norman and Steve Rowe strive to generate some earnings momentum for the High Street bellwether, whose store estate is too big, website too clunk and clothing ranges too out-of-touch.

There is sufficient brand loyalty to buy them time with customers to get it right but even Mr Norman has said the plan is to drive growth on a three-to-five year view so shareholders are going to have to be patient. At least the dividend will help in this respect, now that the firm has stopped squandering money on share buybacks as it did during the later stages of Marc Bolland’s tenure as chief executive.

One thing that might at least make life easier for all retailers would be an improvement in real-term wage growth – in other words wage growth after inflation.

A study of the performance of the FTSE All-Share General Retailers sector relative to real-term wage growth suggests that either an acceleration in nominal pay increases, a slowdown in inflation or both might just help some retailers to some degree and carry on the momentum hinted at by June’s Barclays Report, when football and sunshine appear to have to done the trick.

Source: ONS, Thomson Reuters Datastream

These articles are for information purposes only and are not a personal recommendation or advice