General and food retailers are seen as lacking pricing power and suffering increased competition. Th...
General and food retailers are seen as lacking pricing power and suffering increased competition.
The result is that the market has been merciless on these companies. Both food and general retailing stores have dramatically underperformed the main market over the last year with the S&P Retail Stores - Food index down by 42.31% in dollar terms over the 12 months to 7 February and the S&P Retail Stores - Department index down by 22.34% in the same time period. These compare with a 14.08% rise in the S&P 500 in the 12 months to 7 February.
David Currie, head of US equities at Edinburgh Fund Managers, is underweight ret-ailers but does hold Wal-Mart, which saw its share price increase by 32.49% in the 12 months to 7 February. Wal-Mart is now on a P/E of 46.88 times.
Currie says: "We are pretty nervous about retailing as the companies that are closest to the consumer are bearing the brunt of deflation.
"There are two to three dominant players in each retail area. Wal-Mart, Costco and Target are the key players in the general retailing area. They are also attacking the food retailers bec-ause they are moving into that area.
"These companies have a multi-strand strategy. For example, Wal-Mart has its basic discount stores and its supercentres which are competing with the supermarkets. Wal-Mart also has an international strategy with the takeover of Asda last year. It has even launched an e-commerce initiative which will ultimately become a separate company."
Currie is also keen on Costco, which is a club retailing company and has alliances with American Express among other businesses. Currie says that the concept of joining a retail club is catching on in the US and having previously had a more downmarket image is attracting more wealthy consumers. Costco has bucked the trend other stocks have suffered in this part of the market and saw its share price rise by 34.52% in the 12 months to 7 February. The stock is now on a P/E of 42.92 times.
Currie adds: "The other problem with retailing is that it is a very domestic industry apart from Wal-Mart and Costco. Clearly the Federal Reserve is going to continue increasing interest rates. We would expect another 25 basis points rise in March and perhaps another one at the next Federal Reserve meeting after that. The focus is on slowing the consumer down."
Scott Irving, US fund manager at Morley Fund Management, favours retailing stocks including Target but is underweight retail overall.
Target is involved in discount retailing but is on a P/E discount to Wal-Mart and saw its share price rise by 4.23% in the year to 7 February. The stock is on a P/E of 27.04 times. Irving says: "Target is more upscale than Wal-Mart in terms of its target audience. Around two thirds of its top-line growth comes through customers who spend more than $1,000 a year at its stores.
"There is a huge amount of competition in retailing that is only being exacerbated by the internet, which is causing a huge amount of downward pressure in terms of pricing. The food retailing sector is also a low growth environment."
Irving adds that the highly competitive and low pricing power environment for food retailers is leading the three main food retailers Safeway, Albertson's and Kroger to look to improve their gross margins through merger and acquisitions activity.
For example, Kroger bought retail holding company Fred Meyer last year, which owns three supermarket chains in the US. Kroger, which Irving currently holds, saw its share price fall by 44.14% in the year to 7 February and the stock is on a P/E of 14.85.
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