After news that high street sales figures are rising, now could be a great time to invest in retail shares.
Monthly UK retail sales increased by 0.4% in July, according to figures just out from the Office for National Statistics (ONS), who also revised their earlier figures to suggest monthly growth in June of 1.3%. Overall, retails sales have risen 3.3% year-on-year. Similarly, the British Retail Consortium (BRC) recently reported that July's like-for-like retail sales were up 1.8% on July 2008, with June having brought in a 1.4% jump.
Are these signs that the worst of the recession is over, and that the UK economy is headed back towards growth? There has to be a reasonable level of doubt surrounding the accuracy and statistical significance of figures like this. In common with indicators like monthly house price indexes, it's hard to tell whether the magnitudes of the changes are large enough to compensate for errors due to sample size and random variation -- and the more cynical amongst us might even suggest that the ONS and the BRC are not entirely disinterested parties.
Damned statistics?
Also, the nature of the changes bears scrutiny. According to both the OSN and BRC, some of the biggest rises were in the furniture and household goods sectors, coming on the back of serious discounting (so, more than just the perennial DFS sale, then). It could, therefore, be argued that rises in this sector, rather than indicating an easing of economic hard times, are actually indicators of exactly the opposite -- that the retailers are hurting so badly they're having to sell off stuff dirt cheap, and that with no money for moving house or going on expensive hols, people are spending what little spare cash they have on spiffing up their homes at knock-down prices.
But, even with that caution, there is room for optimism amongst private investors. Even if the recovery isn't here yet, investor confidence in the high street surely can't get much lower, and there are bargains to be had. When the economy really does pick up (and it will), the best of the retailers will be able to rebound with a head start over the sluggards. So what retailers are looking good these days?
Boring is good
I know this is going to sound boring and predictable (both of which, I reckon, are characteristics we should be looking for in a good long-term investment), but I do think Tesco (LSE: TSCO), which is branching out into more and more parts of the retail spectrum every year, is a great company that can be had at a good price.
Today's news that it is expanding its Tesco Personal Finance division can only serve to support that. Already with six million customers, TPF is pressing ahead with its ambition to provide full personal banking services, and now plans to open a new customer service centre in Scotland, creating more than 800 new jobs in the process.
At today's price of 365p, Tesco shares are on a prospective P/E of just over 12 for 2010, and 11 for 2011. That would be probably be fair for an average large retailer in average economic conditions, so it might not seem cheap today. But Tesco is a great retailer, not an average one, and is also expected to pay a dividend of 3.6% this year. The company has an enviable track record of steadily increasing dividends, and as interest on borrowings is covered more than four times over, there's little chance that's going to change any time soon.
Tesco might not be dirt cheap, but great companies never are -- they are sometimes just good value. Tesco isn't just competing with the high street, it is becoming the high street, and I think it's almost certain to continue to reward long-term investors.
Getting its voice back
Another company I was surprised to be impressed by when I looked at it in June is HMV Group (LSE: HMV). Two years through a three-year restructuring plan, aimed partly at shedding its old fuddy-duddy high street image, things were starting to look good.
A couple of months on, the share price is pretty much unchanged at 121p, but if the turnaround reflected in current estimates proves to be accurate, that suggests a forward P/E for the year ending April 2010 of just 9.5, and a dividend yield of a whopping 6%. The dividend has remained solid even through the recent difficult few years, and is currently well covered by earnings, so that's another one that's very unlikely to be cut.
What does the restructuring mean out on the street? I had a look in Liverpool's new HMV store last weekend, and I liked what I saw. With the focus being clearly towards the whole "digital entertainment" market rather than just being a record shop, DVDs, Blu-rays, games, iPods, and other gadgets were all on show, together with shiny ranks of iMacs for browsing. And there were lots of young people in there -- you know, members of the "download generation" who we're told don't go into record shops any more. I wonder what old Nipper would have made of it all.
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