We crown our king of the high street retailers
12th January 2017 14:14
by Lee Wild from interactive investor
Share on
It's the biggest day of the year so far for Britain's fashion retailers. After shocked the City with another profits warning last week, it was important that confidence is quickly restored in what will, in all probability, be another toughie for the sector.
Some of the numbers look good, and all but one of the seven major fashion retail names reporting results Thursday are higher. While some results are still due in - reports next week - most of the heavyweights have fessed up, and we have enough ammunition to confidently crown our favourite.
Marks & Spencer
The debate around rumbles on despite a return to growth at the clothes and homewares (C&H) division during the third quarter. It made much of the early running Thursday, up as much as 6% first thing and nudging the 360p level, its best since June last year.
Newish chief executive Steve Rowe, who's just kicked off a five-year recovery strategy, finally got the C&H business growing again, increasing like-for-like sales by 2.3% in the 13 weeks to 31 December. That's well above consensus estimates for flat-to-1% up.
Better ranges, better availability, better prices and less discounting is the secret to Rowe's success. Well, that's only partly true. M&S admits in its statement that tinkering with reporting dates flatters the clothing and homewares numbers by 1.5%, implying clothes sales really grew just 0.8%.
Even Tony Shiret, analyst at Haitong Securities and M&S fan, is unconvinced.
"At this stage we do not really believe that M&S will get to a point where it is capable of long term sales-based growth given its starting point and the relatively undynamic nature of what has been proposed so far in the UK," he says.
Kate Calvert at Investec Securities doesn't hold back, either. 'Sell', she says, repeating her 290p price target. "It is too early to call a victory, and with a slowdown in consumer spending expected in the year ahead, we believe [C&H sales] could well go negative again.
"Given the low probability of cash returns over the medium term, the change in M&S's future growth prospects, limited forecast visibility and negative [total shareholder return] dynamics, we see further downside potential. Valuation not cheap enough for the risk."
M&S results may have given UBS analyst Andrew Hughes a "warm feeling", but, despite encouraging growth and generous dividend, we'd like to see evidence that third-quarter growth is the start of a trend, not a one-off. Risk here is it's the latter.
SuperGroup
is one of those retailers that blows hot and cold. After strong first-half results Thursday, it's red hot!
Revenue jumped by 31% to £334 million in the 26 weeks ended 29 October, with retail sales up 25%, or 12.8% on a like-for-like basis. Underlying pre-tax profit was up 9% at £21 million. In the past 10 weeks, retail sales jumped 21%, or 14.9% like-for-like.
Despite relinquishing some of their early 4% gain Thursday, SuperGroup shares still trade near record highs. A price/earnings (PE) ratio of over 18 times for calendar year 2017 is "undemanding for an exciting long-term global brand roll-out story," argues Investec's Calvert.
Given estimates for earnings per share (EPS) growth stretch deep into double-digits for at least the next three years, she has a case.
Debenhams
Having just equalled multi-year lows near 51p, the market clearly wasn't expecting much from department store this Christmas. However, better-than-expected results for the 18 weeks to 7 January had short-sellers rushing to cover positions.
At constant currency, like-for-like sales rose 0.5% during the period versus consensus estimates for around flat to down 1%. Over the Christmas period they jumped 5%.
Despite Next's recent collapse, Debenhams still trades at a big discount to the high street bellwether. Assuming a dip in estimates, Debs is on a forward PE ratio of 8.5 for this year and 9.5 for 2018.
"We have a 'buy' rating on Debenhams despite its potential vulnerability to tighter trading conditions because of the low valuation of its sales and the combination of new management and aggressive shareholders," says Shiret.
Plenty will depend on new chief executive Sergio Bucher's plans for the business, due to be fleshed out at half-year results in April.
ASOS
Not since March 2014 and the first of a series of profits warnings have shares traded this high.
They hit £55 early doors Thursday following retail sales growth of 36% during the final four months of 2016, the best in three years and well ahead of expectations. At constant currency sales rose 30%.
Guidance for full-year sales growth increases to 25-30% from 20-25% previously, although the extra income will be ploughed back into the business, so profit estimates are unchanged.
Despite a PE of around 70 for the year to August, Numis Securities analyst Andrew Wade remains a fan, calling the shares up to £65.
JD Sports
It's case of saving the best till last. We've been fans of for years, first backing the shares at 433p in September 2014 (Sprint after record-breaking JD Sports). Strip out the effect of a subdivision late last year and they're now worth 1,789p, a fourfold increase.
A star performer in our series of Interactive Investor Winter Portfolios for the past two years, shares in the £3.5 billion tracksuits-to-trainers chain surged as much as 10% Thursday. Keep this up and a spot in the FTSE 100 is not as crazy as it sounds.
That's because the company has maintained 10% revenue growth in the first half through the final six months of the year. Chiefs now say they'll smash profit forecasts of £200 million for the year ending 28 January 2017 by 15%.
"Whilst we acknowledge that it would be unreasonable to expect like for like sales growth to be maintained at recent levels for a fifth consecutive year, we are confident that both domestically and internationally, our unique and often exclusive sports fashion premium brand offer provides a solid foundation for future development," says executive chairman Peter Cowgill.
Even after Thursday's sprint higher, JD trades on 17.5 times Investec's EPS forecast of 20.2p for the year to January 2018. That's "undemanding", says analyst Calvert, arguing that a calendar-year PE of 16.3 (prior to today's rally) "does not reflect that JD is capable of delivering sustainable double-digit growth for the foreseeable future and is in a good position to join in the European consolidation when it happens."
"Our target price, based on a 10% CY 2017e discount to the European growth peers, increases to 415p (from 365p) reflecting upgrades."
Because it's repaid our faith in prospects for the past few years, we remain loyal to JD and name it our "King of the high street retailers".
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.