For investors looking to give their portfolios a seasonal shake-up, CityA.M. takes a look at analysts’ selections of the retail stocks to keep a close eye on in the coming weeks.
Analysts at Hargreaves Lansdown chose Currys, Asos and Sainsbury’s as the three retail stocks to watch this Christmas.
It comes as retailers have been forced to balance consumers’ desires to enjoy their first Christmas free of Covid-19 restrictions in three years with shoppers’ worries about the surging cost of living.
Currys delivered a dismal profit warning earlier this month, as its chief executive warned that a “tough environment” showed little signs of disappearing in the short-term.
The London-listed retailer acts as “an excellent barometer for the tech side of the retail sector,” owing to its market share position, according to Hargreaves Lansdown equity analyst Matt Britzman.
While the electronics firm sells big-ticket items – such as TVs and laptops – that are “just the sort” of items selected as Christmas presents, their price points mean that “demand could be on the chopping block if household incomes fall,” Britzman added.
What’s more, technology products tend to have short product cycles, such as the iPhone which has a new model come out frequently.
Britzman added: “If cash-strapped consumers decide not to upgrade their model this Christmas, Currys will be left with a surplus of new iPhones. It’s a cycle that leads to higher inventories and ultimately discounting, which would put pressure on already thin margins.”
Despite pressure on margins, there are some silver linings with the retailer, such as its omnichannel model.
“You can enter a store and have access to the entire online shopping range, or speak to an in-store expert in the comfort of your own house,” Britzman added.
However, a dismal Christmas could be a big problem for the retailer, as this is when its shoppers tend to splash the cash the most.
“The group’s valuation is some way below the long-term average, reflecting the short-term difficulties,” Britzman added.
“While this could mark a good entry point for investors willing to accept the immediate risks, keep in mind that things could still get worse before they get better.”
ASOS has also experienced its fair share of tumultuous trading updates this year, with bosses now pledging to reverse the fast fashion firm’s fortunes with a new strategy.
The e-commerce firm reaped the rewards of fashion fans turning to online shopping when physical stores were closed amid the pandemic.
However, today the picture looks “very different,” Britzman noted.
The retailer’s valuation has plunged by around 78 per cent over 2022, after posting full-year underlying profit before tax that had dropped to £22m, down from £194m the previous year.
“In part, the decline in profits is due to cash-strapped customers returning more items this year, which caused higher operating costs and elevated stock levels,” Britzman said.
A discounting frenzy by the retailer in a bid to clear existing stock levels was a “big driver” of a decrease in gross margin.
While issues such as the firm looking to write-off around £115m in stock during the first half of this financial year, “aren’t going to be solved by a strong Christmas performance,” a lucrative sales season “would certainly soften the blow.”
Cash-strapped consumers will be able to find products all along the price range at ASOS, which “should be an advantage relative to other fashion retailers, who typically only target one price-point,” Britzman added.
He said: “The group’s balance sheet is looking in better shape thanks to freshly negotiated terms on credit facilities. That at least offers some breathing room while ASOS tries to get cashflow back into positive territory, something management expect to deliver next year. Though we remain cautious.
“One thing’s for sure, if ASOS is going to turn its fortunes around then a strong Christmas period would be the perfect present.”
BIg Four supermarkets have pumped a lot of money into ensuring consumers can find bargains when shopping for Christmas, with many grocers having price promises on key products.
“We’re cautiously optimistic that the grocery sector could report some bright results this festive season,” Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said.
While retail sales dropped in the UK overall in November, food sales shot up due to shoppers stocking up for Christmas, which “suggests consumer behaviour could be working in the grocers’ favour,” Lund-Yates said.
Sainsbury’s, which also owns general merchandise seller Argos, was a particular focus for analysts owing to its exposure to a wider range of products.
“General merchandise is a riskier area of the market when real wages are falling (after inflation),” she explained. “Buying a new gadget isn’t as important as putting dinner on the table.”
In the first half of the supermarket titan’s financial year, general merchandise and clothing sales dropped 6.1 per cent and 6 per cent respectively.
Lund-Yates added: “While we’re cautious of Argos’ performance, recent figures show that department store and homeware sales are holding up slightly better than expected. This could mean that Argos puts in a more resilient showing than we’re expecting.”
Sainsbury’s has also taken “aggressive action” on pricing, meaning it has recently been able to hike prices after its rivals, “offering its strongest value proposition in years.”
The investment has paid off, with Sainsbury’s the only supermarket to grow volume share since pre-pandemic times, when compared to key rivals like Tesco, Asda and Morrisons.
However, this has hit profits despite the boost to competition, as underlying operating profit fell 8 per cent to £496m in the first half.
Lund-Yates added: “No matter what happens this Christmas, Sainsbury’s has a stronger balance sheet than previous times and free cashflow is expected to run into the hundreds of millions.”