A sell-off in retail stocks weighed on the FTSE 100 today (26 August), with the blue-chip index dropping 0.56% to 9,268.
The biggest fallers were B&Q owner Kingfisher (-4.2%) and Associated British Foods (LSE:ABF), which owns Primark as well as various well-known food and drinks brands. They declined 4.2% and 4.1%, respectively.
The retail rout extended to other FTSE 100 stocks like Warhammer maker Games Workshop (-1.5%) and contract foodservice group Compass (-2.6%).
In the FTSE 250, shares of DIY retailer Wickes slumped 8.7%, while Greggs fell 1.5%.
Under-pressure consumers
Shareholders in these firms can thank analysts at Deutsche Bank for today’s slump. They’ve turned bearish on the UK consumer.
The end of 2024 and early 2025 are likely to have been the sweet spot with real wage growth set to slow and fear of unemployment set to build from here.
Deutsche Bank
Given the pressures on consumers, the bank doesn’t like cyclical sectors like DIY. So it downgraded shares of Wickes and Kingfisher. This makes sense, as people are less likely to be building sheds and whatnot when money and jobs are tight.
Deutsche also changed its rating on Associated British Foods from Hold to Sell. Primark makes up almost half of the group’s sales. And while the discount retailer might benefit from a cash-strapped environment, there’s a risk the branded foods side might see a bit of weakness.
Funnily enough, I’ve not long finished munching a Ryvita cracker, and I’m currently sipping a herbal Twinings tea. Associated British Foods owns both brands, and I’m reassured by its diversified sources of revenue.
It’s not a stock I’ve ever been attracted to because of the company’s sluggish growth. It’s a classic Steady-Eddie FTSE 100 blue chip, notwithstanding today’s fall.
But I do think it looks cheap, trading for less than 12 times forward earnings, while offering a well-covered 3% dividend yield. The Primark owner could be one for long-term investors to check out.
M&S
Due to stubborn UK inflation, Deutsche prefers more defensive food exposure, with higher-income consumer demographics.
Marks and Spencer (LSE:MKS) seems the obvious pick to me here. Its food arm fits the defensive category, while M&S customers are generally more affluent.
The stock is up more than 200% over the past five years. This is due to the supermarket’s turnaround really bearing fruit. Last year, adjusted pre-tax profit jumped 22.2% to £875.5m, the highest that figure had been in over 15 years.
Speaking personally, I’m impressed with its online clothing range. I think there are some smart polo shirts on the site, and I might get myself a couple next month. It’s also launching a second-hand clothing store on eBay to tap into the ‘preloved’ clothing boom.
Having said that, it’s a good job that I wasn’t interested in M&S clothes earlier this year when the firm was hit by a well-documented cyber attack. That forced it offline and took a bite out of profits. Any repeat of that would be disastrous.
Despite preferring M&S over other retail names, Deutsche lowered its price target on the stock, from 450p to 435p. While I would take such price targets with a grain of salt, it’s still 21% higher than current levels.
Trading at a reasonable 10.7 times next year’s forecast earnings, I think the stock is worth considering.
