Recent data suggests that the UK economic recovery might be sustainable after all. GDP is set to recover after five years of lost growth, and retail sales surged in February, despite unrepentant rain and flooding.
It marks a turnaround since Christmas, when most retailers suffered due to squeezed household incomes, with consumers unwilling to part lightly with their cash. Outlook for 2014 is positive, with workers’ pay increasing, along with employment gains driving an increase in consumer spending.
A host of new retailers, many online-based, are hoping to take advantage of this trend by coming to market. Companies such as Poundland, AO and Boohoo have already made their stock market debuts.
I’ll be taking a look at three more well-established retail names, and assessing their fortunes.
Marks & Spencer
Shares in Marks & Spencer (LSE: MKS) are doing better than you might expect, and are up 9% so far this year, versus a 2% drop for the benchmark FTSE 100 index.
For further comparison, Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) (more on Tesco later) is down 12% ahead of a supermarket price war breaking out.
M&S is differentiated enough on the quality of its food for it to ride out this particular storm.
There’s value to be unlocked as M&S moves into e-commerce, with a lot of low hanging fruit as the firm’s outdated IT systems are updated, and new services such as same day delivery are rolled out.
Next
Unlike M&S, Next (LSE: NXT) didn’t face the same difficulties in adapting to the online marketplace. Owing to its catalogue business, Next had the requisite warehouses and logistical skills to more seamlessly transition.
This year, for the first time, Next looks set to beat M&S after reporting profits of £695m.
Formerly derided for its lacklustre clothes, Next has proved itself a solid judge of mass-market taste, and in the six months to 16 February the firm’s market share increased to 7.5% from 7% a year earlier.
Next is a well run company with a focus on returning cash to shareholders. In the most recent results statement chairman John Barton anticipated another year of growth.
Tesco
Fears of a price war have hit the supermarkets hard in the last month. Tesco’s sales were down 2.4% over Christmas, and as part of the response, £200m has been committed to reducing prices.
Brokers haven’t been impressed, and most rate Tesco as a ‘sell’ at present. HSBC weighed in today, noting ominously that the Co-op was once the market leader, with a 25% market share. Bigger, at its peak, than both Sainsbury’s and Tesco combined.
But the past isn’t always a guide to the future, and Tesco is set up well to deliver earnings growth. It has the online presence and physical infrastructure — warehouses and click & collect locations — to better benefit from the increasing trend in online shopping than its rivals.
