As GDP growth slows down in the UK, shareholders of NEXT (LSE: NXT), Ted Baker (LSE: TED) and SuperGroup (LSE: SGP) may have more than one reason to worry about the value of their holdings — even more so now, as it appears clear to me that these three retailers need steady annual GDP growth of 2.5%/3% to justify their lofty equity valuations.
The End Of The Road?
“The British economy grew far more slowly than expected in the first quarter of 2015, official data showed Tuesday, delivering a blow to the government just nine days before a general election,” Reuters reported today.
The UK’s economic recovery slowed sharply, with GDP growth of just 0.3%, according to a preliminary estimate, the news agency added. The construction, production and agriculture sectors shrank, and only services showed a decent pattern of growth.
GDP growth below 1.5% a year is not acceptable: neither for the household — Britain’s indebtedness is still highly problematic — nor for companies that need lots of domestic growth to reward shareholders.
First signs of stress in the non-food retail space emerged last week when French Connection warned on full-year results — its shares sank almost 30% on the day.
Tomorrow, 29 April, NEXT reports its first-quarter results.
NEXT: Solid Business, Risky Investment?
NEXT is a solid business but is not the most obvious equity investment right now.
The problem is that at 17x forward earnings it’ll have to grow revenue between 5% and 10% this year and next to keep up with bullish estimates for dividends and earnings growth. If the domestic economy sputters, the second half of 2015 could be painful for shareholders, whose holdings have lost 6% of value since a record high in mid-March and have risen only 6% this year (-1.4 percentage points vs the FTSE 100 year to date).
NEXT currently trades at 7,165p, which points to downside of between 5% and 10% into the second quarter. At present, its valuation is in line with the average price target from brokers, but I’d be careful about my investment strategy if I held a long position in the stock because comparable 2014 figures were good, and they won’t be very easy to beat.
I warned you this year could have been challenging.
Ted Baker: Still My Favourite Pick
Ted Baker has been one of my favourite equity investments in the UK since it traded at 1,800p, and you’d have recorded a +47.3% performance, excluding dividends, if you had followed my advice 10 months ago. I’d still buy Ted rather than NEXT, but at 25x forward earnings or more, based on conservative estimates, I do not consider it a hard bargain anymore.
So, I’d reduce exposure or I’d take profit if I were invested, after a +30% pre-tax performance this year. At 2,855p a share, Ted Baker now trades about £1 above consensus estimates, but it remans a much more solid investment than SuperGroup based on its profitability and cash flow profile.
SuperGroup: Still My Least Favourite Pick
I do not fancy SuperGroup’s fundamentals, and its stock is way too expensive based on its volatile earnings profile and several other financial metrics. A top-down approach doesn’t make much difference to the investment case, either, in my view.
Based on forward earnings, the stock trades above 17x, which is a demanding valuation for a business that has to prove it would not disappoint investors in future as it did in recent quarters. I need more evidence from its new management team in order to suggest that its stock could be a bargain at 990p, where it currently trades after a 40% decline in the last 12 months or so.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.