The share price crash that clothing retailer N Brown endured on Thursday should serve as a warning to those thinking of investing in the embattled retail sector.
Land Securities Group (LSE: LAND), like N Brown, posted strong share price gains in 2019. The shopping centre and retail park operator gained 23% in value over the course of the year. This strength came despite a series of worrying trading updates and leaves its shares in danger of a severe price collapse, in my view.
Losses mounting
The FTSE 100 firm certainly spooked investors with its latest financials in November. Back then it recorded a pre-tax loss of £147m for the six months to September, swinging from a profit of £42m a year earlier. It said that “the retail market continues to be challenged as retailers adapt to structural change, rising costs and a more cautious consumer.”
LAND said that there had been “a number of high-profile company voluntary arrangements (CVAs) and administrations during the period” and that limited demand for space and poor investor sentiment was weighing on rental and capital values.
It would be wrong to suggest that Landsec’s woes are just a reflection of the tough economic conditions in the UK, though intense Brexit uncertainty has seriously damaged the retail sector of late.
The property giant is also suffering from citizens’ steady migration from bricks and mortar to cyberspace. This trend away from shopping on foot is a problem that threatens to last much longer than the current political and economic stresses that are damaging Landsec and its peers. According to Springboard, retail footfall in December has fallen in the UK for nine out of the past ten years and dropped 2.5% last month.
Too much risk
Land Securities faces some significant structural challenges. It’s why City analysts expect the Footsie firm to record a rare 2% earnings fall in the fiscal year ending March 2020. And the number crunchers expect the bottom line to remain under pressure after the current period – they predict a 3% profits drop in fiscal 2021.
The chances of these insipid estimates being downgraded in the months ahead remain high, too. The popularity of online shopping continues to grow as retailers invest more and more money in their digital operations. The threat of Brexit uncertainty enduring through 2020 also undermines hopes of an improvement in shopper confidence.
This is why Landsec’s bulky 5% dividend yield has no appeal for me. The chances of prolonged earnings pain, and a subsequent reversal in the share price, are too high in my opinion. Besides, a forward price-to-earnings ratio of around 17 times doesn’t reflect the company’s high risk profile, in my eyes. I’ll avoid it like the plague.
