Fund Manager Focus 29/08/2014
David Thorpe gets to grips with fund manager Dan Nickols.
Britain's shopkeepers are sending conflicting messages to the stock market. As the sector prepares for the Christmas and New Year season, which traditionally accounts for 30-40 per cent of overall sales, a mixed crop of results and sales figures is giving analysts and investors pause for thought.
With inflation, interest rates and unemployment all low, the background for personal spending should be good. Consumer confidence can be fickle, however, and the impact of a likely war in the Middle East is hard to gauge.
Analysts point out that there is some overcapacity, especially in the clothing market. Price wars, triggered by major groups which can afford them, such as Asda Walmart, are very much on the cards.
Most observers agree with Teather & Greenwood analyst David Stoddard that 'Christmas will be fine.' But they are concerned about the impact on margins of price-cutting in the sales periods immediately before and after the festive season.
'We are still positive,' says Richard Ratner, retail guru at beleaguered broker Seymour Pierce. 'Retail profits are less good than they were but, relatively, they still look attractive.'
Clothing sales have been hit by a warm September that has kept buyers away from new winter designs, and in some cases retailers risk building stocks to uncomfortable levels. The Confederation of British Industry's latest retailing survey suggests overall sales picked up slightly in September in response to new autumn/winter product lines, after an August which showed the weakest growth for nearly two years. 'The underlying trend remains weak,' warns the CBI. 'Sales growth is well below the rates reported in the first half of this year.'
Comparing sales with a year earlier, 41 per cent of the companies surveyed said they were up, while 23 per cent said they were down. The 'positive' balance of 18 per cent is better than August's 5 per cent, but well down on the 40 per cent-plus recorded in the first four months of the year.
Overall, retail shares show defensive qualities in a bear market. But some firms, including those sorting out previous problems or occupying profitable, niche markets, offer more positive attractions. Recently at 1,550, the FTSE General Retailers' index was 14 per cent off its level a year ago. Meanwhile the FTSE 100, Small Cap and All Share indices have fallen 25-28 per cent over the same period.
Marks & Spencer, which is enjoying an internal recovery from the consequences of managerial complacency, recently reported a 10 per cent increase in sales for the three months to 28 September (on a year earlier). Clothing sales were up nearly 14 per cent, and food ahead 7.5 per cent.
Chief executive Roger Holmes attributes the increase to the company's own new product ranges, coupled with 'buoyant high-street conditions'. Of course, the figures were enhanced by comparison with a weak comparable performance the previous year.
Sainsbury, which concentrates more on food, achieved sales growth of 3.9 per cent in the three months to mid-October, and expects 2.8 per cent for the half year. Group chief executive Peter Davies speaks of 'solid progress in a period of significant internal change – despite a slower market'.
Somerfield's shares crashed nearly 50 per cent on a day when the group issued a profit-warning – the second in two years – and chief executive Alan Smith resigned. The stock market is still uneasy about tough competition for its Kwik Save subsidiary – a concern similar to that felt for discount retailer Matalan.
Big Food Group suffered a 7.7 per cent like-for-like sales drop at its Iceland frozen food retail chain in the three months to September. This was offset by progress at its wholesale business.
Elsewhere, clothing retailer Next disclosed that sales, which grew 12 per cent in the third week of August, slowed to a 1 per cent increase in the first week of September. Chief executive Simon Wolfson blames unexpectedly warm September weather: 'We are looking at our own ranges to see what we can do, but there is nothing we can do about the weather.'
While insisting the company will avoid big markdowns in the January sales, he warns that Next will not be able to control the amount of stock going into end-of-season sales.
Expansionist fashion retailer Ted Baker also blames recent warm weather for 'disappointing' sales growth. The company, which has a licence agreement with Bloomingdales of the US and is developing a 7,500 sq ft-store in London's Covent Garden, says retail sales in the seven weeks to 29 September rose no more than 3.5 per cent.
The picture is gloomier at women's clothes retailer William Baird, which has passed its interim dividend following first-half losses of £9.2 million. Here the problem is more one of a perceived loss of fashion sense by the company, currently overhauling its design effort, which says 'the vast majority of our problems have been addressed.'
Baird, which is currently the subject of a takeover offer from Jacques Vert, must hope it manages to sort itself out as successfully as New Look, a discount retailer of women's clothes (with an emphasis on suede, denim and crochet tops). After a profit-warning 18 months ago, the company changed its board, rearranged its supply chain and moved towards larger format stores. The other day it reported a 12 per cent increase in sales for the six months to September.
Chief executive Stephen Sunnucks attributes the sales growth – accompanied by interim profits of £27.3 million pre-tax – to store refurbishment, a shorter supply chain and new product ranges in footwear and other items. But he concedes: 'No-one really knows what will happen to consumer spending – it's difficult to predict.'
Interim profits at JJB Sports, Britain's largest sports retailer, fell 17 per cent to £39.3 million, a setback blamed by chairman David Whelan on 'challenging competitive conditions'. The results were announced days after the sudden death of chief executive Duncan Sharpe. The shares have this year fallen from 480p to 153p.
There has been speculation that JJB's management will seek to stage a buy-out or take the company private some other way, which could well see the shares bounce back. Director Andrew Thomas recently increased his holding by buying 8,580 at 141p.
Among the larger groups, M&S, at 331.75p, continues to make headway through its internal reforms and new product lines. And defensive qualities in a price war are usually more in evidence at Tesco (201.5p) and supermarket group Morrison (204.25p) than at Sainsbury (276.75p) and Safeway (200.75p). Safeway, though, offers some spice on suggestions from the City that it might gain from a property break-up.
At the smaller company level, New Look deserves credit for staging a recovery that has taken its shares from around 50p at the beginning of last year to 241.5p today. The company says it expects to report interim profits up by at least £17 million to £44 million, while analysts are now going for a full-year figure in the region of £80 million.
A strong share of a specific market is usually encouraging. Topps Tiles, Britain's largest ceramic tiles specialist, has achieved double-digit sales and profits growth every year since it floated in 1997. The company rounded that off with a 22 per cent pre-tax profit increase to £11.5 million for the year to June, on turnover nearly doubled to £91 million. Chief executive Barry Bester claims replacement demand for tiles should take a good chunk of any slack left by a downturn in new housing.
Growth should be spurred by a new 50-50 joint venture in the Netherlands. At 235.5p, the shares are up about 15 per cent over the year, but remain more than £1 below their peak in early 2001.
Game, which sells items such as PlayStation 2 and GameCube, made £31.5 million pre-tax last year on sales of £434 million. And it has a dominant position in the games sector of the retail market, which is predicted to grow by 25 per cent this year.
Analysts reckon Game, which even made a tiny profit in the usually barren first half, could make pre-tax profits of more than £41 million next time. At 113.5p, down from a year's high of 158.75p, the shares look undervalued.
Specialist book retailer Ottakar's, at 156.5p, is also gaining from popular fads, in particular Harry Potterand Lord of the Rings.Last year the company increased pre-tax profits from £2.8 million to £4 million, on sales up 14 per cent to £86.3 million. Bulls see £4.8 million pre-tax this year and £6.4 million next.
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