Retail shares could shoot up over the coming months despite recessionary headwinds, reports from City analysts suggest.
Analysts at Peel Hunt said the market was “undervalued,” following a season of profit downgrades issued by major UK retailers that sent investor conference sinking.
Many retailers were hit hard by red-hot inflation which led consumers to be more cautious about their spending and also led to hikes in operating costs for businesses.
But professionals from the investment bank said that promising profit upgrades from two of the sector’s “bellwethers”, Dunelm and M&S, have helped drive the share prices of both up.
“Consensus forecast upgrades are concentrated across the ‘core’ stocks – furthering our belief that the sector as whole remains undervalued,” the analysts added.
M&S raised its outlook last week after it revealed a 11 per cent hike in sales across its food offering in the first 19 weeks of the year.
Its investment in trendy clothes and homeware has helped draw customers in despite the cost of living crisis. By consequence M&S’s share price is up 35 per cent over the last year.
Earlier this summer, cushion-and-bedding favourite Dunelm also raised its guidance for the year after its decision to pass on price cuts to consumers helped sales.
It now expects earnings for the year to be “slightly ahead” of previous expectations of £188m. Dunelm’s share price is up 37 per cent in the last year.
“The UK economy is facing high inflation, rising interest rates, sluggish growth and rising unemployment,” Victoria Scholar, head of investment at Interactive Investor, told City A.M.
“While investors may have thought, for good reason, to shy away from consumer-related stocks this year, there have been considerable pockets of outperformance, defying the macroeconomic doom and gloom, highlighting the importance of stock picking in the current environment.”
She added: “Next has outperformed the stock market year-to-date, also upgrading its full-year forecasts after a strong second quarter. Sports Direct and Primark, owned by AB Foods have also delivered strong results.”
“Although recent retail sales figures in the UK painted a weak picture, there are clearly still winners in the sector, which are successfully navigating the uncertainty and continuing to drive sales.”