You can generally rely on Christmas to throw up at least one retail casualty. And it’s become something of a tradition at this time of year for me to pen an article highlighting a few stocks for which Christmas could deliver a major setback or, indeed, a terminal decline.
As last year’s fare, I served up Game Digital at a share price of 54p (now 23p), Mothercare (at 70p, now 16p) and Debenhams (33.5p, now 3.9p). Despite the hefty falls in their shares, I still see these three turkeys as stocks to avoid today. I remain unconvinced by their business models and I wouldn’t be at all surprised to hear bad news on Christmas trading from any of them.
However, following the worst November footfall figures since the 2008 recession, it’s looking like December is also shaping up to be a shocker for the high street. As such, we could see a whole host of names reporting disappointing Christmas trading come their traditional January updates. Here are four more retailers I’m happy to avoid.
30 years of hurt
Marks & Spencer (LSE: MKS) may be a fixture of the high street and a stalwart of the FTSE 100, but it’s a stock I’ve been bearish on for a long time. As I discussed in an article devoted to the company, I’m not convinced M&S can ever deliver long-term sustainable profit growth and rising shareholder value. I see it as a business that if it didn’t exist, you wouldn’t invent it.
Various management teams have tried different transformation strategies to get it on a path to sustainable growth. Indeed, the company seems to have been perpetually in transformation mode for decades. Erratic dividends and a share price at a level first hit some 30 years ago are hardly compensated for by annual shareholder perks of one 10%-off voucher, one M&S Cafe voucher and a selection of spend & save vouchers.
Next (LSE: NXT) had been a hugely successful retailer and delivered terrific value for long-term shareholders, but has struggled in the last couple of years. Online growth continues to run at a good pace, but the company has been suffering with declining store revenue.
With personal debt in the UK at unprecedented levels, there are signs consumers are finally starting to make a long-overdue cutback in their discretionary spending. I think this could show up in Next’s Christmas trading update on 3 January. My other concern is that the company has reported a leading indicator for increasing bad debt in its £1.1bn customer debtor book, although we may not hear more on this until the annual results in March.
While I see Next as a stronger business than M&S, I’m happy to sit on the sidelines, at least until I’ve seen how Christmas trading went and how the debtor book is looking.
Of course, bigger-ticket retailers are likely to be particularly vulnerable to any slowdown in discretionary consumer spending. These include Dixons Carphone, the computers, TVs, phones, and white goods group, and DFS Furniture.
I’m not only concerned by the impact on this pair of a fall in discretionary spending. I’m disconcerted that Dixons has announced plans to ramp up its debtor book and that DFS’s business model relies heavily on being able to offer customers credit via third party financing.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.