Is it time for investors to consider retail therapy?

With retailers set to face one of their busiest periods courtesy of Black Friday and the upcoming festive season Ian Forrest, investment research analyst at The Share Centre, gives his thoughts on whether now is the right time for investors to get some retail therapy.

Is it time for investors to consider retail therapy?

The Office for National Statistics today reported a 0.3% fall in retail sales figures for October compared to last year, although some caution is merited given that sales in October 2016 were particularly strong and unseasonal weather may have played a part. A 3.1% rise in average store prices may also have something to do with the weaker sales performance.

Food stores saw the biggest falls while prices in that sector rose 3.5%, the biggest rise in four years. With Black Friday looming rapidly retailers may take some comfort from the fact that online sales rose 10.7% in October.

The big retailers

There have been few positive headlines in the world of retailing in recent months. A quick glance at the underperforming shares of some of the biggest names in the sector, such as Marks & Spencer, Next, Tesco and Dixons Carphone, tells its own story.

Rising inflation due to the weak pound has led to higher prices for consumers where retailers feel they can pass them on. Others have decided not to do so and taken a hit to their profit margins in order to protect market share, and in the hope that it’s only a temporary situation.

Adding to the woes is that wages have not been rising as fast as inflation for a number of years, which has led to a squeeze on consumer spending power. Some have turned to credit to keep spending but with interest rates now rising the cost of borrowing may reduce the appeal of that method of funding. Higher mortgage payments are also likely to reduce spending.

Much of that is feeding through into company results. In clothes retailing, Next reported a 7.7% drop in third quarter sales at its high street stores, while Marks & Spencer struggled to match last year’s numbers. Fashion clothing retailer Primark has so far defied the gloom with good sales in the UK which may reflect its focus on offering value products.

All the while, the supermarket sector remains as competitive as ever although there have been some welcome signs of growth recently and Tesco’s resumption of dividends is a further indication of its gradual recovery.

Black Friday

The trend towards online retailing by consumers has continued this year. Further evidence of that shift is likely to come on Black Friday, the annual event next week when retailers offer discounts to shoppers on their websites. The growing importance of the event to many companies, such as Dixons Carphone, can be gauged from the fact that many of them have extended it across several days, although Amazon continues to provide strong competition.

Given so much uncertainty, we would advise that investors remain cautious about the sector until there is some improvement in sales and profit margins. They should focus on companies which are embracing online and mobile retailing, in particular those that have established a niche for themselves and so do not face fierce competition.

Longer term the prospects may improve for retailers generally as inflation is expected to ease down next year.

 

Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest and tax policies may change. 

 

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