Retail shares have been strong performers over the last year, but Ed Bowsher thinks valuations now look a little high.
Retail shares have had a good year. If you take out the supermarkets and food players such as Tesco
(LSE: TSCO)
and Sainsbury
(LSE: SBRY)
, share prices in the remaining general retailers have risen 33% over the last 12 months.
Marks & Spencer
(LSE: MKS)
has done even better and soared 59%, way ahead of the FTSE All Share index which has "only" risen 16%.
So yes, I wish I had bought shares in M&S a year ago, but I'm not tempted to buy shares in general retailers now. The outlook for Britain's high street doesn't look rosy to me, and many valuations look high.
After all, the average consumer will probably have less money to spend next year. Interest rates went up last week and further rises in 2007 look likely. On top of that, Gordon Brown may have to raise taxes and the global economy may slow. What's more, food prices are rising which leaves less money to be spent on clothes and items for the home.
But sluggish demand isn't the sector's only problem. Several leading retailers are effectively increasing supply by expanding their retail space.
Debenhams
(LSE: DEB)
, for example, plans to open ten new department stores in 2007/8, taking its total estate to 133 outlets. M&S plans to increase its floor space by 20% over the next five years while Next
(LSE: NXT)
has increased its floor space by 20% in just 12 months. Primark grew its floor space by 40% over the same period. Both Next and Primark plan further growth.
What's more, the general retailers are facing tougher competition -- Tesco and Asda are both boosting their non-food offer, and Internet shopping is on the rise. Business is booming at Internet specialist, Asos
(LSE: ASC)
where sales grew 93% in the first half. Moreover, 10% of sales at Next are now transacted online.
Of course, fans of Next and some of the other big chains could argue that the Internet isn't a threat but an opportunity. And Next's Internet sales figures support that view. But given the Internet's growth, does it really make sense for the leading chains to grow their floor space? Surely somebody is going to suffer?
Moreover, valuations look high too. The FTSE All Share currently trades on a price/earnings ratio of 14, yet the general retail sector has a p/e of 27.5. That's high! So if you really want to invest in general retail, I think you need to pick your shares carefully.
In some respects, Marks & Spencer looks attractive. Its recent recovery has been impressive and profits are growing at a decent lick. Still, given the structural problems facing the industry, I don't think a p/e of 18 offers compelling value.
On a p/e of 13, Next looks cheaper at first glance. The management team has a good track record and overall turnover is rising thanks to new store openings and growing non-store sales. On the other hand, like-for-like store sales fell 7.5% in the six months to July. Much as I like Next, I'd be reluctant to pay the current share price of £18.69. I'd be more interested if the share price fell back towards £16.
One smaller player, Jacques Vert
(LSE: JQV)
looks interesting. The company lost 66 concessions in 2005 when department store chain Allders went bust but has made a good recovery since then. It's trading on a p/e of 8 and I think it could be a decent share price performer in the next few years.
That said, I've got no plans to buy Jacques Vert or any other general retailer. For me, too much space means too small profits.
Four Cheap Retailers | Bargain Share Alert | Marks & Spencer Keeps On Growing
