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Lockdown restrictions are forcing consumers to do most of their festival shopping online
Thursday 26 Nov 2020 Author: James Crux

A second national lockdown in England and restrictions in Wales and Scotland mean the run-up to Christmas 2020 will be very different to anything retailers and shoppers have experienced before. This year is going to be a digital Christmas and that has implications for numerous companies on the stock market, which we will explore in this article.

People have started ordering goods online far in advance of normal buying habits for two reasons. Firstly, so many shops are currently closed, and people are being told to stay at home, so ordering online is their only way of buying goods.

Secondly, a lot of people are ordering early as they don’t want to risk lockdown restrictions being extended and being unable to get to the shops to buy Christmas presents. It’s easier to buy online now and avoid the risk of delivery delays.

SALES ON THE MOVE

Boosted by early Christmas shopping, October’s ONS retail sales figures were unexpectedly strong with sales rising 1.2% over the month and up a sizeable 5.8% year-on-year.

UK grocers saw strong online food sales as tiered lockdowns were rolled out and many consumers continued to work from home, while staying in also stoked non-food sales as people ordered household products, toys and electronics to spruce up their homes and keep family members entertained indoors.

Ian Geddes, head of retail at Deloitte, believes 2020 will be the most digital Christmas ever, as many lockdown habits have become engrained with consumers.

He says: ‘Most notable is the shift to online shopping, accounting for 28.5% of all sales by value in October as consumers fully embrace the convenience of e-commerce, and another national lockdown keeps non-essential shops closed.’

Geddes says many retailers are already ‘applying creativity to deliver what is certain to be the most digital Christmas ever; whether it is by value and volume of online purchases or by bringing the in-store Christmas shopping experience online with virtual visits to Santa’s grotto, and festive virtual workshops to follow at home.’

And yet, as Christmas food delivery slots fill up and online orders build, Geddes warned that ‘the virtual queue is also gathering’. He adds: ‘Ensuring that fulfilment, delivery, and “click and collect” resources can keep up with demand will be key to managing the online surge.’

Selling a greater proportion of goods online creates challenges for retailers. Not only do they need a functioning website to handle web-based orders, they also require warehouse space as well as the right systems and staff in place to ensure orders are processed accurately and efficiently.

BLACK FRIDAY IMMINENT

Black Friday (27 November) will be a massive event as shoppers looks to bag bargains. Yet there have already been signs that retailers are beginning to buckle under the strain of online orders.

Amazon warned shoppers to purchase early to avoid disappointment, while supermarkets have been overwhelmed with demand as people plan for Christmas.

JD Sports (JD.) has been working to reduce an online order backlog, by bedding in new automation technology to increase fulfilment capacity, ahead of Black Friday and Christmas.

Due to increased social distancing measures and lockdown restrictions across large parts of the UK, JD Sports has experienced high levels of demand from customers choosing to shop online, while in line with Government guidelines, the retailer has also had to reduce the number of staff working in its UK distribution centre to ensure they are able to work safely on site while practising social distancing, triggering temporary delays recently in shipping online orders.

POTENTIAL FESTIVE WINNERS

Bumper demand for smartphones, laptops and white goods augurs well for online electricals specialist AO World (AO). A strong Christmas would top a successful year for the business which has thrived during the pandemic.

Lockdown beneficiary Naked Wines’ (WINE:AIM) direct to consumer model has come of age during the pandemic too. The online wine purveyor has positive sales momentum heading into the peak festive period.

British chocolatier Hotel Chocolat (HOTC:AIM), which began as a web-based business, is also one to watch for potential boom in Christmas sales. After all, buying a nice box of chocolates via the internet is an easy present idea.

Homewares seller Dunelm (DNLM) has upped its digital game under chief executive Nick Wilkinson; and premium British lifestyle brand Joules (JOUL:AIM) entered the festive selling season with very strong e-commerce sales growth.

We would also keep an eye on online musical instruments seller Gear4music (G4M:AIM) and fantasy miniatures maker Games Workshop (GAW) as they’ve been enjoying considerable success this year.

SHIFTING HABITS

Coronavirus restrictions have temporarily brought social life to a halt, but people will still want to look their best this Christmas and that creates huge opportunities for online fashion pure-plays and best-in-class omni-channel clothing and footwear purveyors.

Fast-fashion retailer ASOS (ASC:AIM) reported positive sales momentum heading into the Black Friday and Christmas period, though the AIM giant did caution that the pandemic is disrupting the lifestyles and economic prospects for many of its fashion-loving 20-something customers.

One marked trend reported by fashion retailers since the start of the pandemic is the unusually low customer returns rates they witnessed through lockdown, though Boohoo (BOO:AIM) has been planning for rates returning to normal levels. The pandemic has made shoppers less frivolous and event-led with social life on hold, and more reluctant to make outings to return items due to virus-related fears.

Should this trend towards lower return rates persist this Christmas, it would mean lower costs and higher margins for retailers, although lower return rates may create a slight headwind for the returns management services arm of Clipper Logistics (CLG). That said, the logistics solutions and e-fulfilment services specialist, whose customers including ASOS and Asda, is still a beneficiary of the continued structural shift to e-commerce accelerated by Covid.

Another growing trend is for major brands to sell their wares direct to the consumer in a bid to expand their margins. Therefore, one risk to the Christmas fortunes of JD Sports, and potentially to Sports Direct owner Frasers (FRAS), is that Nike is increasingly selling its sought-after running shoes and sneakers directly to customers and less via retailers.

DIGITAL CHRISTMAS WINNER - BUY SHARES IN NEXT

Even if they can open during December, non-essential retailers face truncated trading thanks to Covid restrictions and the task of selling a much larger proportion of goods online.

If we had to put our money on one general retailer to meet the challenge this Christmas it would be Next (NXT), the Simon Wolfson-led clothing-to-homewares colossus that traditionally kick-starts the festive reporting season in early January.

Generating more than half of its sales digitally, Next’s online sales grew by a bumper 23.1% in the third quarter to 24 October, reflecting strong sales both at home and overseas and more than offsetting a 17.9% drop in sales from physical retail stores.

Not only run by one of the sector’s best-in-class management teams, cash-generative Next is admired for its tight cost control and good stock management, meaning it avoids the need for margin eroding discounts.

And given the ongoing requirements for social distancing, Next’s out-of-town retail park outlets should trade well once non-essential retail shops re-open in the brief window before Christmas (subject to Government decision).

Put 5 January 2021 in your diary, as this is when Next will update investors on its sales performance up to and including Boxing Day.

THE UNDERDOGS?

The Works (WRKS) could be a stock to keep an eye on. While its physical stores have been affected this year by closures, online sales roughly doubled over the 19 weeks to 25 October and The Works’ board games, jigsaws, art and craft materials and books for children and adults could be in demand as Christmas presents.

Lesser known, digital value retailer-to-educational resource supplier Studio Retail (STU) recently flagged a strong performance from its primary business, Studio, which has thrived during the period since lockdown. The company sells a wide range of goods and used to be called Findel.

Half year results on 8 December will provide investors with insight into festive sales trends. Risks to consider with Studio Retail include the fact the group remains indebted, while a prolonged recession would diminish the purchasing power of Studio’s core consumer demographic.

DIGITAL CHRISTMAS WINNER - BUY SHARES IN SAINSBURY'S

The decision by Sainsbury’s (SBRY) to close 420 standalone Argos stores might give the impression it had failed with its 2016 acquisition of the toys-to-home products seller.

Yet that would be wrong as the business has been a saviour to the company in recent years. There is merit in its store closure actions and as we approach Christmas the future for Argos looks brighter than ever.

Earlier this month new chief executive Simon Roberts announced a plan to refocus the business on food. It’s worth noting that Sainsbury’s has historically done well at Christmas with its premium Taste the Difference range boosting revenues and margins.

Roberts also laid down the rule that the non-food businesses must ‘deliver in their own right’. They include Habitat, where Sainsbury’s plans to push the brand harder, and Argos.

Argos is already a key sales growth driver and outperformed the market for furniture, electronics, domestic appliances, office equipment and gaming in the group’s first-half period to 19 September.

It also outperformed Sainsbury’s own general merchandise business, which continues to suffer negative sales momentum, and even beat the food business in terms of growth.

A key attraction is its superfast delivery, which gives it an edge over competitors including Amazon. Customers can order by 5pm and receive the item by 11pm on the same day, or order by 8pm and receive it the following day, often very early on. Amazon also offers same day or next day delivery, but customers must order by midday for same day delivery and next day delivery often doesn’t happen until late in the day.

Sainsbury’s says 90% of Argos orders are now made online versus 55% four years ago, representing a major shift in customer behaviour.

During the first lockdown in March, sales rose even though standalone Argos stores were closed, and their gradual reopening barely made a difference to the brand’s revenue growth rates suggesting Sainsbury’s doesn’t need as many standalone stores.

Sainsbury’s says customers have changed the way they shop with much greater take-up of home delivery and click and collect, although it’s likely the lockdown closure of standalone Argos shops also forced customers to behave differently.

Opening 32 local fulfilment centres will give Sainsbury’s greater ability to service homes and stores quickly with Argos products and means stores don’t have to hold as much stock.

In the old days, there was something magical about seeing the items materialise on the conveyor belt in-store and scanning through the catalogue at Christmas time was a favourite pastime for many. But unlike a lot of activities now confined to nostalgia Argos has made the jump to the modern world and Sainsbury’s has a big opportunity this holiday season and beyond. Buy Sainsbury’s shares.

DELIVERING THE GOODS

Logistics companies will play a major role in this year’s digital Christmas bonanza, namely getting the products to the customer’s door.

Royal Mail (RMG) has been seeing an uptick in parcel volumes but plummeting letter volumes and a stubbornly high cost base mean there are bigger issues to resolve even if does have a good Christmas.

Costs are set to soar this quarter as it adds 33,000 temporary staff to cope with demand over the peak Christmas season which will eat into the higher projected revenues. There is also the omnipresent threat of Amazon which has invested heavily in its last-mile delivery service, turning itself from a customer to a competitor.

We prefer Berkshire-based DX Group (DX.:AIM) as a share to own, particularly as historical problems seem to have been addressed and the business is bouncing back.

DX provides parcel handling, secure, courier and logistics services to business and residential addresses across the UK and Ireland.

The DX Express business operates next-day and scheduled courier deliveries while the DX Freight business also offers logistics solutions including managing warehouses and operating customer-liveried vehicles.

Despite a decline in activity during lockdown, the firm managed to increase turnover and post a profit in the year to June, reallocating resources from business-to-business customers to the business-to-consumer market as online shopping surged. Trading since June has been ahead of last year and the firm expects to increase volumes and expand its margins this year.

Another firm well placed to benefit from the switch to an online Christmas is van hire and accident management firm Redde Northgate (REDD). Now a ‘mobility solutions’ business, it supplies, services, repairs and recovers light vans for a large customer base including major e-commerce, delivery and consumer goods firms.

With 110,000 owned vehicles and over 500,000 managed vehicles in the UK, Ireland and Spain, the firm has huge scale and can respond quickly when demand surges.

Also, whereas previously it would take on debt to finance an expansion of its fleet, a fall in leasing costs means the firm no longer has to buy vans outright if it wants to grow.

The shares should be considered as higher risk as Northgate has a mixed track record, net debt is quite high and the merger with Redde is still relatively new.

However, trading since the first lockdown has been above last year’s levels, and as visibility improves for its customers more of them are likely to shift to longer-term rental deals with minimum lock-ins rather than hiring vans as and when they need them.

WAREHOUSING: STORING THE GOODS

If the more gradual shift to online shopping seen prior to the pandemic has increased the value of warehouse assets, then the acceleration in this trend since February 2020 and the upcoming Covid Christmas should supercharge valuations.

To sell an increasing volume of product over the internet, retailers need hubs to store goods and process and distribute orders. This includes large automated warehouse facilities and smaller sites in urban locations for last mile delivery.

A recent study published by the UK Warehousing Association showed there was less than 3% available warehouse capacity nationwide.

Unlike some of its industrial-focused peer group, many of which trade at premiums, Warehouse REIT (WHR:AIM) trades at a discount to net asset value of 2.9%.

This may be a question of scale as it has a more modest-sized portfolio which traditionally has included smaller assets. However, following a £153 million fundraise in July the company has been reshaping the portfolio and the discounted valuation seems increasingly unjustified. We believe the shares are worth buying.

The most recent acquisition was a demonstration of Warehouse REIT’s continuing ability to acquire assets at reasonable valuations despite increasingly fierce competition for assets.

A portfolio of five warehouses in a variety of locations was purchased for £43.6 million which translated into a net initial yield of 6.7%. While the increased clamour for this type of asset may be a challenge when it comes to adding to its portfolio, there is scope to add value through asset management, by increasing rent and bringing in new tenants.

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