February retail sales volumes grew by nearly 6% following a short-lived slowdown in January, showing...
February retail sales volumes grew by nearly 6% following a short-lived slowdown in January, showing the continued strength of the European consumer.
Deflation, however, is also a central characteristic of the retail sales sector with clothing and mail order retailers seeing little in the way of pricing power.
Bruce Hubbard, director at SchroderSalomonSmithBarney (SSSB), says: 'Retail inflation has subsided once again to 0.2% on the back of near 5% deflation in clothing and 2.3% deflation in mail order.
'Intuitively these figures appear quite high relative to anecdotal company comments. Food continues to be the only category registering price inflation of 3%, largely due to fresh produce so is likely to be a temporary effect. This does not suggest inflationary pressures are on the horizon and hence is good for sector valuation.'
The ongoing buoyancy of consumer spending may prompt an interest rate rise, says Hubbard.
He adds: 'But although sector earnings forecasts on the whole assume a second half slowdown in demand, we argue that a modest rate rise is already discounted.
'Clothing and mail order volumes were very strong, offset somewhat by higher deflation. Household goods, such as electrical and DIY goods, had yet another month of value growth of more than 7%.'
According to SSSB research, overall retail sales accelerated to 6.1% made up of a 5.9% increase in volumes and 0.2% inflation. Food retail volume growth decelerated to 2.6% and inflation was the main contributor to value growth of 5.6%.
The surprisingly low clothing figures for January, at 1.1% were restated to 2.5%. Clothing growth accelerated significantly in February to 6.5% as very strong volume growth of 11.4% was apparently accompanied by a hefty 4.9% deflation rate.
Hubbard says: 'While we believe deflation is still a fact of life for clothing retailers, a level of near 5% in February feels very high. Non-store retailing was the highest growth category highlighting the recent strength in mail order sales.
'Household goods registered another strong month, sales in value terms grew at more than 7% for the seventh consecutive month.'
Michael Nicol, investment manager at Scottish Value Management, has taken only short positions in retail stocks believing valuations are no longer supported by underlying fundamentals. The only opportunities on offer are special situations positions.
He says: 'We believe both clothing and food retail stocks are over-valued. The valuations are not giving returns that are justified. We are not expecting to go back into retail, unless there are stock specific stories or significant restructuring stories.'
Contrary to Nicol's opinion, Hubbard sees good opportunities and cites John Lewis as sales continue to strengthen, having weakened significantly post 11 September. He says: 'Average sales growth in the past four weeks has been 8.7% against 6.5% in the previous four weeks. The cumulative growth rate has returned to the over 8% levels registered before 11 September.''
Retail sales grew in February.
Consumer spending buoyant.
Mail order companies strong.
Food stocks overvalued.
Second-half slowdown in demand.
Interest rates are set to rise.
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