Beware any UK consumer-facing stocks in your portfolio

It might be time to take profit on some of your best performing investments
Thursday 14 Sep 2017 Author: Daniel Coatsworth

Consumer confidence is influencing the direction of many share prices at present. Anyone invested in a business which relies on consumer spending is already likely to be nervous; and the near-term outlook doesn’t look promising.

You may wish to think about taking some profit in your best performing UK consumer-facing stocks and switching to more broad investments with defensive characteristics for the time being. For example, retailers Boohoo.com (BOO:AIM) and Sports Direct (SPD) are up 86% and 44% respectively since the start of the year.

A few examples of places to which you could redirect your profits include investment trusts with a capital preservation strategy such as Personal Assets Trust (PNL) or Capital Gearing (CGT).

What's going on?

Last week saw a mixture of profit warnings and gloomy outlook statements from two companies which sell food and drink and one company which sells doors and windows.

Respectively, these were pub operator and brewer Greene King (GNK), restaurateur Fulham Shore (FUL:AIM) and Safestyle UK (SFE:AIM). They all saw their share prices fall by more than 15% on earnings warnings.

Those bits of news also prompted share price declines among peers and other sectors reliant on the consumer. For example, B&Q-owner Kingfisher (KGF) had a bad week on the market, so did kitchens seller Howden Joinery (HWDN).

We’ve already had plenty of profit warnings from retailers over the past few months including Dixons Carphone (DC.) and DFS (DFS).

Now we’re seeing problems in the supply chain including a warning earlier this week (11 Sep) from UP Global Sourcing (UPGS) which distributes items such as small domestic appliances. It predicts no revenue growth in its current financial year, blaming retailers for not wanting to order stock too far forward in the future.

Consumer credit problem

We’ve written several times over the past year about the UK’s elevated level of personal debt. Consumers have been using credit cards and loans to fuel their spending and this is unsustainable.

Rising inflation has pushed up the cost of living so consumers are likely to have less money in their pocket after paying for the costs of everyday living. You then need to account for the cost of servicing debt – perhaps acting as a wake-up call that they can’t keep spending on credit indefinetely.

Visa’s latest analysis of consumer spending shows weakness in car purchases, air travel and clothing. However, it notes a rise in ‘small treats’ such as jewellery, beauty products and trips to
hair salons.

Overall it says UK consumer spending is on course for its weakest year since 2013. It is therefore vital you check the source of earnings when looking at consumer-facing stocks from an investment perspective. The higher the proportion of sales from the UK, the higher the earnings risk in the present climate, in my opinion.

A dominance of earnings from UK could leave a stock in a difficult position. For example, BooHoo talks about being an international business but nearly two thirds of its sales come from the UK. Any weakness in its home territory would certainly be disastrous for the share price.

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