Pricing pressures and differential cost inflation is prompting come UK fund managers to take a cauti...
Pricing pressures and differential cost inflation is prompting come UK fund managers to take a cautious stance towards retailers.
Britannic Asset Management is underweight the retail sector, believing interest rates have not yet peaked. Keith Burdon, fund manager at Britannic, says he believes the sector is suffering from over-capacity, particularly in clothing retail. He says: "Clothing retailers are suffering from differential cost inflation with rents on premises rising along with employee wage demands while intense competition in the sector is forcing prices down."
Britannic used to hold Matalan, the discount retailer, a good example of the increasing need for retailers to offer lower prices, according to Burdon.
The problems retailers are facing are reflected in the performance of their share prices since the start of the year. The FTSE General Retailers index has fallen by 12% while the FTSE All-Share has only declined by 4.3%. The average yield offered by members of the general retail index is 3.6%, 70 basis above that offered by the All-Share.
When selecting retail stocks Burdon says he looks for companies which are growing their toplines. There is a strong positive correlation between a company's share price and its sales growth. However, contrary to his view on clothing retailers, Burdon is bullish on Next, which offers a yield of 3.6%.
He says: "The company has strong management with the ability to achieve sales growth of between 5-6% year-on-year, which is good in this environment. In addition it is well placed to cope with, and take advantage of, the presence of the internet."
Burdon also likes Kingsfisher, highlighting its ownership of B&Q. Apart from the growing popularity of DIY driving sales, the chain is also attractive due to its growing strategic value.
He says: "The large US group, Home Depot, is looking to break into the European market. It will probably open some of its own shops first but then may decide to acquire B&Q."
Another attraction Kingfisher offers is it is one of the only pan-European retailers available in the UK market, according to Eric Moore a fund manager on Gartmore UK Growth & Income. Kingfisher has stakes in Darty and Castorama, two French retailers selling electrical products and DIY equipment respectively.
Moore also likes Kingfisher for its UK electrical retailing chain, Comet.
Continuing this theme Moore has exposure to Dixons. On the upside last year the company lost 1% in topline growth but this was compensated for by cost cutting. On the downside Moore is negative on Freeserve and is unconvinced it has a viable business model. He adds: "I can not see how Freeserve will make any profits so it rather muddies the waters for Dixons' shareholders."
Moore says inflation needs to rise for retailers to be able to pass on some of their costs to consumers which is unlikely due to the tight monetary policy employed by the Bank of England.
He adds: "One of the only positives in the short term is the closure of C&A which will create some spare capacity."
Reasons to be cheerful
Total investment reaches £9m
Medium to long-term capital growth