Or are they? We take a look at a handful of Britain's biggest retailers in a search for bargains.
After my recent look at statistics suggesting the UK retail sector has started a comeback, in which I fingered supermarket to general retailer Tesco (LSEO: TSCO) as a likely candidate for years of future growth, I thought it worth having a closer look at the sector.
And I was somewhat surprised to find that most large retailers, on current results and forecasts, are just not looking that cheap. Here are a few of Britain's largest general retailers, compared with Tesco. Prospective P/E and dividend yield are based on the next full-year forecasts, which in all cases is the year ending 2010, and share prices are at close of play last Friday (21 August).
| Company | Mkt cap (£bn) | Share price (p) | Prospective P/E | Dividend (%) |
|---|
| Marks & Spencer (LSE: MKS) | 5.4 | 343 | 14 | 4.4 |
| Kingfisher (LSE: KGF) | 5 | 214 | 17 | 2.5 |
| Next (LSE: NXT) | 3.3 | 1678 | 11.5 | 3.3 |
| Tesco (LSE: TSCO) | 29.3 | 370 | 12.6 | 3.4 |
Best Dividend
The superior dividend of Marks & Spencer (LSE: MKS) might make it look the most tempting of that bunch, but at 15p per share, it's expected to be cut 16% from this year's 17.8p. And that was in turn slashed by 21% from 2008's payout of 22.5p per share.
We need to bear in mind, too, that at its year end in March 2009, M&S was sitting on net debt of approximately £2.6bn, which was up from 2008's £2.5bn. Interest on that debt was covered approximately twice by earnings, but that means a full half of the company's earnings went to service debt. I'd say M&S needs to get that debt figure down quite a bit before the shares start to look attractive at this price.
Shirts and frocks
Next (LSE: NXT) perhaps looks the most attractive in P/E terms, but a company focused so much on fashion would be expected to have its share prices depressed more in recessionary times than more general retailers that include more essential items like food in their inventories.
But having said that, we still do need to be clothed, and clothing is another of those things that online selling still hasn't managed to dominate -- people really do like to touch and feel their clothes (and try them on) before buying them, and Next might well be looking a good bit better as an investment prospect in a year or two's time. Lowered earnings are expected for 2010, but the company's dividend was maintained this year, and is expected to be maintained next year too, at 55p per share. That is possible because the company has low debt, with interest covered nearly 7 times by earnings.
Having mentioned the touchy-feely advantage of real clothing stores, that small (market cap just £248m) but rising star ASOS (LSE: ASC) has to be mentioned. Selling fashion online, ASOS appears to have succeeded where previous attempts have faltered, and has seen rising earnings right through the last few years, with 65% growth this year, and over 30% per year forecast for the next two years. The company has no debts, but is on a prospective P/E of 19 for 2010, despite not paying a dividend, so its shares aren't exactly cheap.
Still doing it yourself?
Kingfisher (LSE: KGF), owner of the iconic B&Q brand, along with a number of others (including Screwfix), has handled the recession pretty well so far. With profits down a bit last year and this, the company is expected to be back in growth next year, with earnings per share up around 25%, and more to come in 2011. Its P/E of 17 for 2010, though, does seem to have that rebound already factored in. Net debt, at £1.1bn in January 2009, seems manageable, with interest covered 2.6 times. And more importantly, debt is falling. Ironically, Kingfisher might well have enjoyed some benefits from the recession and the fall in house prices, as people stay where they are and renovate rather than moving up the ladder.
Should we buy?
Overall, there don't seem to be any screaming bargains in the retail sector, from which any quick profit is likely to be made, with all of the above appearing to be pretty fairly priced based on forecasts for the next couple of years. But why have the share prices of such giants held up so well when other, smaller, companies have been hit hard? It's perhaps the "flight to quality" that many people embark on in hard times, when they see the biggest and best-known names as stalwarts likely to come up smelling of roses. (And, of course, with the high street banks having been included in the idea of "quality" in previous tough times, their absence this time leaves the field a good bit narrower).
I think long term investments in any of the big five above are likely to look good in 5, 10 and 15 years time (though M&S, with its high debt, is the one that probably concerns me the most in the shorter term).
Another thought, inspired by my quick look at ASOS, is that there may well be some shorter-term bargains to be had from smaller retailers, and I think I'll come back to those at a later date for a closer look.
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