Surprise trading joy for UK retail sector

Grocers lead the way as festive reporting frenzy gets underway
Thursday 12 Jan 2017 Author: James Crux

Many retailers have reported better than expected trading over Christmas, according to the first batch of figures up to 10 January.

Another round of companies were scheduled to report on trading as this edition of Shares was published (12 Jan) including Tesco (TSCO) and ASOS (ASC:AIM).

Who has done well?

Winners so far include WM Morrison Supermarkets (MRW) and BooHoo.com (BOO:AIM), both of whom we have written about favourably in Shares over the past few months.

Total retail sales in the UK grew by 1.7% in December 2016 versus 1% a year earlier. That’s according to the latest BRC/KPMG Retail Sales Monitor (RSM).

We remain cautious towards the retail sector for 2017 amid fears that many companies won’t have the confidence to pass on extra input costs and so profit margins could be squeezed. Our preference is online retail over high street players.

Who are the losers?

Missing out on the December spending splurge was Next (NXT), which sent a chill wind through the fashion sector with its poor trading update on 4 January.

Chief executive Simon Wolfson downgraded 2016 profit estimates again, warning of a tough year ahead for clothing and footwear sales.

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Which stocks should I buy?

We continue to believe the market has got it wrong with Morrisons. At the time of writing there wasn’t a single ‘buy’ rating on the stock by analysts, according to Reuters data. We are big fans of the business and firm buyers at 244.3p.

The supermarket revealed 2.9% like-for-like sales growth for the nine weeks to 1 January, its strongest Christmas performance for seven years. Latest figures from Kantar Worldpanel show the fastest recorded growth in the UK grocery market as a whole since June 2014.

Morrisons’ chief executive David Potts upgraded full year profit before tax guidance to a £330m-to-£340m range which would be the first increase in profit since 2011.

Which stocks should I avoid?

Surprise winners over Christmas include Majestic Wine (WINE:AIM) and B&M European Value Retail (BME). We would hold off buying these companies until there is evidence that strong trading isn’t a one-off event. (JC)

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