Signs of growing stress on the UK high street leaves Debenhams (LSE: DEB) in a somewhat precarious position as we enter 2017.
Data released by the Office of National Statistics (ONS) this week showed that retail sales growth had slowed to just 0.2% month-on-month in November, braking heavily from the 1.8% rise posted in October. Critically for Debenhams, clothing sales tanked 1.4% last month.
Rising inflation in the coming months threatens to put consumer spending power under increased pressure, a particular problem for sellers of premium fashion and homeware like Debenhams. Latest ONS data this week also showed that consumer price inflation hit a fresh two-year high of 1.2% last month.
With Debenhams likely to implement further discounting to stop sales from flatlining, the City expects earnings at the store to tank 13% during the 12 months to August 2017. And whilst this results in a conventionally-low P/E ratio of 8.5 times, I reckon the likelihood of yet more painful downgrades to profit forecasts still makes the business an unappealing pick at current prices.
Retailer slides
2016 has proved an ‘annus horribilis’ for Sports Direct International (LSE: SPD). The stock has shed just over half of its value during the course of the year, with accusations of poor working conditions in its warehouses denting shopper appetite for its cut-price sportswear.
And the bad press surrounding Sports Direct is unlikely to abate any time soon as its workplace culture remains under the microscope. In addition, increasing pressure on consumer wallets and adverse currency movements are likely to heap further pressure on the retailer’s margins. Sports Direct saw reported pre-tax profit sink 25.1% during May-October as a result of heavy sterling weakness.
The number crunchers expect Sports Direct to suffer a 52% earnings slip in the year to April 2017, resulting in a P/E ratio of 16.7 times. I reckon this is far too heady given the company’s tough outlook.
Support stock’s struggles
I also believe the possibility of extended revenues weakness at Mitie Group (LSE: MTE) makes it a risk too far at present.
The outsourcer has already released two profit warnings since the end of summer as business activity has dried up — the business saw revenues dip 2.6% between April and September. And Mitie could be in line for further revenues turmoil as Brexit negotiations look set to drag on and on.
Just today, German home affairs spokesman Stephan Mayer told the BBC that it would be “a little bit naïve” to suggest that a trade deal could be hammered out within two years of Article 50 being invoked.
The City expects Mitie to suffer a 29% share price decline in the 12 months to March 2017, creating a P/E ratio of 12.2 times. Although far from bad on paper, I reckon the support services play remains a poor pick given that market conditions continue to worsen.
