While the Greek debt crisis is a concern for the UK economy, with it having the potential to hurt confidence, the outlook for the UK retail sector remains very bright. For starters, GDP growth is strong, with the UK being one of the fastest growing economies in the developed world.
Furthermore, inflation is around zero, which means that even small wage rises are being enjoyed by individuals, with people feeling as though they have more cash in their back pocket than they have for a number of years. As a result, demand for consumer goods is on the up, while low interest rates mean that using plastic when you spend has never been cheaper.
Clearly, this is great news for fashion retailers such as JD (LSEL JD) and Debenhams (LSE: DEB). They have both delivered performance that has been held back by a challenging retail environment, with margins being squeezed as customers have focused more heavily on price. And, while the current situation is an improvement, Debenhams’ recent trading update showed that there is still some way to go before normality returns.
Despite this, Debenhams is expected to deliver earnings growth of 6% next year, which is roughly in-line with the growth rate of the wider index. And, with its shares trading on a price to earnings (P/E) ratio of only 12, an upward rerating appears to be very much on the cards. Similarly, JD has a very appealing PEG ratio of just 1.1, since it is expected to post earnings growth of 11% in each of the next two years.
Meanwhile, stocks such as Pets at Home (LSE: PETS) also stand to benefit from more favourable trading conditions. Certainly, animal owners do not skimp on things such as vets fees during recessions unless absolutely necessary, but buying cheaper pet food and fewer pet accessories is a reality of a challenging economic period and, as such, Pets at Home should stand to benefit from an improving outlook just as much as its retail peers. In fact, Pets at Home is expected to increase its earnings by 15% in the current year and this puts it on a PEG ratio of just 1.3, which indicates that growth is on offer at a very reasonable price.
Of course, life for supermarkets such as Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) has been even tougher than for most retailers in recent years. And, while the process of winning back customers is unlikely to happen all that quickly, Sainsbury’s seems to be adopting a sound strategy. For example, it has ditched the focus on price and is now offering good value products, which should help to improve margins and maintain the brand as an upper-mid tier operator. And, with Sainsbury’s having a P/E ratio of just 12.3, there is considerable scope for an upward rerating in the long run, although its performance is likely to remain volatile in the months to come.
