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Why we could be seeing a golden opportunity with FTSE retail shares right now

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Many FTSE retail shares have fallen in the stock market crash. But with the lockdown lifting for non-essential retail outlets in England later this month, we could be seeing a golden opportunity.

For example, in the FTSE 100, Next and Burberry remain well down from their levels before the coronavirus crisis.  And in the FTSE 250, it’s a similar story with stocks such as Dunelm, Marks & Spencer, Greggs and Frasers.

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Fear and opportunity with FTSE retail shares

Meanwhile, there’s a fair amount of fear and uncertainty in the air about retailers. Will they survive lockdowns, and can they thrive in a world featuring Covid-19? But investors have also been mulling whether the attitude of shoppers has changed

During lockdown, many people have managed without lots of the things they had before. And lots of people see benefits in the change to their lifestyles. So, when the restrictions lift, will they shun takeaways, restaurants, shops and all manner of things they used to spend their money on?

I take the opposite view of that argument. In yesterday’s half-year results report from ten-pin bowling operator Hollywood Bowl, the chief executive was upbeat. He reckons the firm will benefit from pent-up demand when it finally throws open its doors to customers again.

And I reckon he’s right about the demand for loads of things. People will likely fall over themselves to buy takeaways, clothes and everything else they’ve been denied, as soon as they can. My best guess is demand will be robust for whatever retailers are able to deliver within the social-distancing rules.

On top of that, the strong demand could lead to retailers maintaining chunky profit margins. We need only look at stocks such as Kingfisher and B&M European Value Retail to see what could happen. Those underlying businesses have been able to adapt and continue trading through the crisis. And their shares have recovered well from the stock market crash.

A stock-picker’s market

However, I wouldn’t buy retail shares indiscriminately. For example, FTSE SmallCap share Card Factory (LSE: CARD) may have a tough time from where it is now. The company has a fair bit of debt. Today’s full-year results report to 31 January reveals total borrowings of almost £148m on that date. And the figure balloons to nearly £294m if you add lease liabilities.

To put that in context, the company reported an operating profit of almost £76m. But that was achieved before the coronavirus crisis. Now, the store estate remains closed. And the company intends to open just 10% of it in mid-June to test the water before opening more. Meanwhile, online trading has been higher during the lockdown period, but internet sales remain a tiny part of the overall business.

The business and the stock had been weakening in the years leading up to this crisis. And the company had been exploring new ways to do business, such as partnerships via concessions and supply arrangements. And expanding internet sales. But I reckon Card Factory is at the sharp end of the declining trend in high street retail, so I’m looking at other stocks instead.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of B&M European Value, Card Factory, and Next. The Motley Fool UK has recommended Burberry and Hollywood Bowl. 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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