3 UK stocks to avoid this summer

Inflation just hit 9% and continues to weigh on consumer spending. With that in mind, here are three UK stocks I’m avoiding this summer.

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Key Points

  • Inflation has hit 9% and the higher cost of living is weighing on consumer spending.
  • Retail sales data doesn't indicate a bright future for retail stocks.
  • The current geopolitical situation and lockdowns in China bring a lot of uncertainty for commodity stocks.

Inflation data released for the month of April wasn’t pretty, as the consumer price index hit 9%. As the cost of living crisis continues to weigh on consumer spending, here are three UK stocks I’m avoiding this summer.

An unfashionable stock

boohoo (LSE: BOO) is one of the UK’s biggest fashion retailers. The online fashion retailer had already been 30% down this year, but plunged a further 12% after it released its FY22 results. Nonetheless, it’s managed to recover most of its post-earnings loss since then.

The firm had already been starting to see a slowdown in sales growth due to “Significantly longer customer delivery times as a result of the pandemic”. Nevertheless, its new distribution centre in the US is expected to go live in mid-2023. With next day and two-day express delivery options available, this could help ease the supply chain constraints that boohoo is currently facing, and help the stock price.

However, with inflation continuing to weigh on consumer spending, I expect sales growth to continue declining. Management shares my sentiment too, as guidance for FY23 is for low-digit revenue growth. Expensive freight costs have also impacted its bottom line as the firm saw its profit margin decline from 5.2% in FY21 to -0.2% in FY22. For that reason, I won’t be buying this stock for now.

In the eye of the storm

The unfortunate events of the Russia-Ukraine skirmish has battered the Ferrexpo (LSE: FXPO) share price. Commonly known for being a high-dividend yield stock, the stock is now trading at 65% off its all-time-high.

The Ukraine-focused firm faces a large amount of uncertainty given the ongoing war there. Any further escalation might run the company out of business as its mining operations are located just east of Kyiv, where it’s more susceptible to Russian attacks. Additionally, China’s city-wide lockdowns have driven iron ore prices down. This will inevitably impact Ferrexpo’s top line in the near to medium term. Most importantly, the firm decided to defer its dividend payments. The board said that it will continue to assess the situation in Ukraine and make a decision on dividends when appropriate. With many investors initially buying the stock for its dividend, this is a stock I’m avoiding.

Getting the boot

Aside from sky-high inflation, Dr Martens (LSE: DOCS) will also have to worry about the recent retail sales figures. Although positive for the month of April itself, retail sales for the three months to April fell 0.3% as high inflation hurt purchasing power. That’s one reason why its stock is down 50% this year.

The majority of the firm’s revenue stems from the Americas and EMEA region. With inflation continuing to spiral out of control, this doesn’t bode well for Dr Martens’ near-term outlook. As central banks in these regions rush to raise interest rates, its debt levels start to become even more alarming. The firm has a debt-to-equity ratio of 140%, a declining free cash flow, and higher operating expenditure. These aren’t factors that are favourable when I invest in UK stocks, especially in a high interest rate environment. As such, I’ll be looking to purchase other shares with much more favourable fundamentals.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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