Retailers under the cosh

No one should be surprised that retailers in the UK are struggling at the moment.  We are 4-5 years into "austerity" and other than the financial elite who have benefited from QE, there is little in the way of new money about for Mr and Mrs Average to spend. The market, at least in the way it looks at many retailing stocks seems to expect the type of pre-2007 spending, much of which was on credit anyway, to continue.  At least that's the way it looks if you look at some of the analyst expectations for FTSE stocks.

So, against this backdrop it is interesting to see that some retailers have actually done pretty well or at least held up in the face of austerity, while others have struggled and some gone under.  The market however, seems to have labeled them all the same, retailing to a large degree is an unloved sector right now almost regardless of performance.  Unless you think the world is coming to an end or that we are never likely to see another consumer boom, sooner or later things will turn around and good companies even in the retailing sector will be in demand again.  Here's a few that should be around for a long time and do well.  

Tesco has already been mentioned elsewhere here, but it really does look like an unloved giant right now.  It has mainly struggled to keep pace with others in the UK, but as it had built up a 30% take of the major retailers market, it did seem inevitable that this would be impossible to maintain.  The market has punished the company share price with a vengeance since it announced its first profit warning back in January.  A profit warning that basically said that profits would come in at the lower end of analyst expectations.  Profits for the company as a whole including overseas were actually up for the year, almost £200 million higher than the previous year at an impressive £3,835 billion.  Some FTSE350 companies would be happy with a £200 million profit on its own.  City analysts still expect Tesco to hit £4 billion in profits in the next two years or so despite all the negativity and falling share price.

On the back of recent falls, Warren Buffet has been a heavy buyer while UK fund manager Neil Woodford has been a seller.  Buffet likes to buy market leaders and ride the ups and downs of market sentiment.  Woodford saw better opportunities elsewhere.  Only time will tell which is right.  

Tesco have responded to city criticism by refocusing on its UK operations, but it will take time to turn around, especially when you take into account that the competition in the UK market are also good companies under the cosh.


Sainsbury and WM Morrison have both done well in the last 4 years despite austerity.  Both have more or less performed in line or bettered analyst expectations.  Sainsbury announced in January its best Christmas trading ever and promptly fell 5-6% a few days later on the back of Tesco's "profit warning".  


Sainsbury Pre-tax profits (year ending March)


2008  £479 million
2009  £466 million
2010  £733 million
2011  £827 million
2012  £799 million


Dividend yield for the same 5 year period 3.6%, 4.2%, 4.3%, 4.3% and 5.3%.  Dividend cover is currently 1.7, P/E 10.4. Sainsbury has seen its share price more than halve in value over the same period, the market no longer being prepared to pay any premium for mainly food retailers.

W M Morrison Pre-tax profits (year ending Jan)

2008  £612 million
2009  £655 million
2010  £858 million
2011  £874 million
2012  £947 million


Dividend yield for the same period, 1.6%, 2.1%, 2.8%, 3.6% and 3.8%.  dividend cover is 2.4 and next year the dividend forecast is over 4.0%, P/E 10.3.  Considering that Morrison has no online presence it has done well to increase its market share.  Share price has fallen recently not helped by the Finance Director saying that he will be moving on.  Still one to watch for future growth.


One to watch in the FTSE 250 is Brown (N) which has performed solidly increasing its profits from £78 million five years ago to £96.9 million in the latest financial year.  The dividend yield has also gone up from 3.6% to 5.5%, dividend cover 2.2, P/E 8.3.  There was also a report a week or so ago that ASDA might be looking at a takeover at 360p a share, current price 241.6p.  This was downplayed, but if market talk of 360p a share is to be believed then the company is seriously undervalued at current levels. While the bigger retailers tend to carry quite a lot of debt, they also have significant assets.  Brown on the other hand has very little debt and might be attractive to a bidder in the future.


http://www.telegraph.co.uk/finance/markets/marketreport/9339973/Asda-looked-at-1bn-N-Brown-takeover-deal.html


Data from DigitalLook