The economy is buoyant but there are plenty of reasons why the retail sector remains depressed, not ...
The economy is buoyant but there are plenty of reasons why the retail sector remains depressed, not least overcapacity.
In the year to date the FTSE General Retailers index has fallen by 12.9% compared with a 3.6% decline in the All-Share.
Jon Thornton the manager of Aberdeen UK Growth is underweight the sector as he sees overcapacity in the high street and at out of town sites. The arrival of Wal-Mart has put an additional pressure on the other supermarkets, according to Thornton.
He adds: "Discount stores have put pricing pressures on the traditional stores and their margins. Also customers do not expect price inflation and in some cases expect deflation. The retail market is now very competitive."
Johnson Fry is slightly underweight the sector and as well as being bearish on the pricing power of companies it sees the internet generating further competition.
The internet factor can be seen as an opportunity or as a threat and currently the group views it as a threat, according Chris White, fund manager at Johnson Fry. He says: "Frankly I will not be rushing out to buy CD or book retailers with the arrival of Amazon in the UK."
Going forward Thornton says the upward direction of interest rates will not help the sector which benefits more from a low interest rate environment. He adds: "There may be a sector rally but the trading environment will not get much easier."
Aberdeen has exposure to one of the better performers in the sector Matalan, the discount store chain. In the year to 13 March 1999, the shares are up 56% and Thornton believes the growth will continue as the company continues to roll out more stores. Other companies which he favours are Next and Dixons.
Parts of the retail market White is bearish on include department stores which he sees as unfocused and motor retailers which are selling relatively expensive cars compared with the rest of Europe. He says: "The kind of companies I favour have pricing power, dominate their market and are benefiting from economies of scale."
An example of this kind of company is Kingfisher. The company owns B&Q which is the dominant market leader among DIY retailers, according to White. In addition he says Kingfisher should benefit from owning the French retailers Darty and Castorama as the economy in that country recovers. He adds: "The company also owns Liberty Surf which is going to be floated in the next few weeks. It is the French version of Freeserve."
A further stock White favours is JJB Sport which again has a dominant market position. For the 12 months to 13 March its shares grew by 37% and they now trade on a P/E ratio of 14 times.
Investec Guinness Flight is heavily underweight the sector with anecdotal data showing that sales are down according to Jeremy Rigg, head of UK equities at Investec. Rigg favours Boots although he accepts that the company is threatened by supermarkets and in particular the entrance of Wal-Mart which can offer pharmaceutical goods at lower prices. Concern over the future of Boots has led to a 21% fall in its share price since the start of the year.
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