Christmas Crackers

Five gift-wrapped picks for festive portfolios
Thursday 01 Dec 2016 Author: James Crux

The Brexit vote looms large over the retail sector. A devaluation of the pound is set to import inflation, putting the squeeze on consumer spending which is already showing early signs of being affected by economic uncertainty.

Nonetheless, there are reasons to be positive near-term. Sterling weakness could persuade UK shoppers to spend more at home this year, while London shops are reporting strong growth in international shoppers due to the drop in the pound. Thus far, consumer confidence has held up better than feared and with rising prices expected in 2017, the nation’s shopkeepers may benefit short term as consumers pull forward their spending.

Winter warmers

The flurry of January Christmas trading statements is traditionally kicked-off by Next (NXT). These updates will give investors a picture of how retailers fared over the festive selling season, which began in earnest with this year’s extended Black Friday and Cyber Monday bargains bonanza.

Many retailers have had negative experiences of US import Black Friday, citing disruption to Christmas trading patterns and squeezed profit margins. Though there are winners, as demonstrated by an increased amount of deals starting earlier than ever this year.

FinnCap analyst Roger Tejwani expects electronics retailers to trade well this Christmas given price rises from the new year have been well publicised. ‘Overall, I’d expect it to be a fairly robust Xmas across the sector as people buy ahead before tightening their belts in the new year, albeit subject to how much of Xmas shopping is brought forward to Black Friday,’ comments Tejwani.

Michael Stewart, retail analyst at Panmure Gordon (PMR:AIM), believes Black Friday winners will include John Lewis as well as online fashion retailers (BOO:AIM) and ASOS (ASC:AIM), Dixons Carphone (DC.).

Oft-touted IPO candidate The Hut, the online health and beauty retailer behind the Myprotein sports nutrition brand, could also benefit. Among others, Stewart believes Black Friday losers will have included quirky fashion brand Ted Baker (TED), whose website was down for hours at the start of Black Friday.

Retail Feature1

Considering the ‘comps’

One factor to consider in predicting the performance of a retailer is its festive performance last time out, as this tells you how easy or tough prior year comparatives will be to beat.

In 2015, Marks & Spencer (MKS) delivered its best ever Christmas in food, although like-for-like Clothing & Home sales fell 5.8% in the third quarter due to unseasonal weather and poor availability.

Rival Next’s festive performance also suffered due to warm weather, though tougher competition for online arm NEXT Directory also had an impact. Clothing market conditions remain testing, yet there is potential for either retail giant to exceed the market’s subdued expectations.

Retail Feature2

Argos, now part of the Sainsbury’s (SBRY) stable, saw like-for-like sales melt by 2.2% due to volatile Black Friday trading, so could surprise to the upside with the help of same-day home delivery service FastTrack. One wildcard worth watching is GAME Digital (GMD), the video games specialist whose Christmas ‘comps’ are so poor it might just serve up a positive festive surprise in January.

In contrast, Debenhams (DEB) faces demanding festive comparatives following last year’s record Christmas, like-for-like sales up 3.7% in the seven week Christmas period to 9 January.

Sofas seller ScS (SCS) delivered strong growth in orders over the key Christmas and January sales period last time out, a performance which won’t be easy to top, while Majestic Wine (WINE:AIM) trades against exacting 7.3% like-for-like growth in its legacy Majestic Retail business for the ten weeks to 4 January 2016.

Retail Feature3

Beneficiaries of bumper spending by overseas shoppers and a focus on gifting are likely to include luxury leader Burberry (BRBY) and premium chocolate brand Hotel Chocolat (HOTC:AIM), while the incoming cold snap is positive for Superdry brand-owner SuperGroup’s (SGP) outerwear ranges.

Dixons Carphone (DC.) 332.10p


Demanding comparatives are worth noting at electricals-to-telecommunications retailer Dixons Carphone (DC.), which achieved 5% growth in like-for-like sales over the 10 weeks ended 9 January 2016. This reflected a record Black Friday and share gains in all markets for the merged retail titan.

But another strong festive trading period looks in store for the Carphone Warehouse-to-Currys PCWorld brand-owner. Dixons Carphone’s sheer scale and scope of its consumer electronic products range leaves it well placed to sustain positive top-line momentum and profit over the festive season. And with price hikes for electricals set to rise in the New Year, consumers are likely to jump on Dixons Carphone’s heavily discounted televisions, laptops, mobiles and white goods over the extended promotional period. Shares in Dixons Carphone are also going cheap, having been marked down due to the uncertainties of the impact on the UK economy following the vote for Brexit, though the retailer is more than simply a UK or European play, rolling out stores in the US under a joint venture with Sprint (S:NYSE). Based on Liberum’s year to April forecasts of 30.8p of earnings and a 10.6p dividend, Dixons Carphone trades on a forward PE of 10.8 and offers a well-covered yield of 3.2%. (BOO:AIM) 121.5p


‘I think (BOO:AIM) will be one of the top performing apparel sites this week,’ explained Panmure Gordon’s Michael Stewart on Black Friday. ‘Boohoo has had momentum for the last couple of quarters and that should continue.’ The fast-fashion online retailer’s heavy investment in IT systems and ecommerce platforms leaves it set fair for Christmas. Deep discounts on affordable dresses, tops, jackets and footwear should prove popular with a youthful, web-savvy customer base growing in the UK, Europe and US and drive further forecast upgrades following January’s Christmas trading statement. For the year to February, Panmure forecasts growth in earnings from 1.1p to 1.9p, rising to 2.5p thereafter.

Tesco (TSCO) 211.75p


For the six weeks ended 9 January 2016, Tesco (TSCO) reported 1.3% growth in UK like-for-like sales, benefiting from lower prices and improved customer service. This metric that doesn’t look unduly tough to beat given the renewed momentum behind the business under CEO Dave Lewis. Tesco has emerged as something of a consumer champion following its ‘Marmitegate’ victory, has returned to growth should make further win back additional market share this Christmas. Under UK & Republic of Ireland boss Matt Davies, the UK’s biggest retailer has just delivered its biggest ever Black Friday event, slashing prices across electrical and home products as well as toys.

Marks & Spencer (MKS) 335p


Unloved retail bellwether Marks & Spencer (MKS) delivered its best ever festive performance in food last year, sales up 17% in the key Christmas week, although like-for-like General Merchandise (now Clothing & Home) sales were poor. Third quarter like-for-likes fell 5.8% due to warm weather and poor product availability. So expectations are set low this Christmas, giving Marks & Spencer an opportunity to beat soft clothing comparatives and hopefully, deliver another robust turn in food as shoppers treat themselves to its premium food ranges. Sentiment towards M&S is poor in the wake of weak half year results (8 Nov) but new CEO Steve Rowe has outlined a sensible strategy to return M&S to sustainable profitable growth.

Card Factory (CARD) 244.72p


Discount gifts-to-greetings cards purveyor Card Factory (CARD) faces demanding comparatives, having enjoyed strong growth in non-card products last year. Yet we still see the retailer as a likely festive winner and share price weakness as a buying opportunity. Card Factory’s cards and gifts ranging from Christmas hats and stockings to calendars and mugs should fly off the shelves as consumers look to deliver Christmas on a budget. Led by new CEO Karen Hubbard, Card Factory has invested in improving the quality of its ranges and its new site is growing from a low base.


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