Retail therapy can beat inflation blues when investing

The big squeeze is just beginning. Despite the Spring Statement tax concessions, the surging cost of living will compel households to cut spending. This is bad news for retailers as yesterday’s figures for High Street sales underline.

The 22 per cent fall since the start of the year in the shares of High Street bellwether Next embodies the concern surrounding the sector. 

Commodity, energy, freight, labour and other costs are mounting, forcing down profit margins. Next is warning its prices are set to rise by 8 per cent by the autumn. 

However, some names could be spared the worst of the attrition. Analysts argue that supermarkets, discounters and some luxury brands may prove more resilient, if only because of the love of a consolatory treat in tough times. 

Our passion for pets means we will carry on spending on animal care, come what may. 

Also, although Britain may face the worst decline in living standards since the 1950s, some are still lucky enough to be able to splash out on a £5,000 wristwatch.

So let’s look at the potential winners and losers. The extinction of Debenhams and the closure of house of Fraser stores has lessened competition for Next and Marks & Spencer whose shares have also tumbled this year.    

Some contend that these falls are overdone, pointing to the strength of the M&S food business, supplier of £5 Gastropub Steak And Chips Pie and other affordable indulgences.  

Bid action is a possibility. US and other private equity groups have deep pockets and love a British bargain, having in the past two years acquired Asda and Morrisons. 

Tesco, whose shares are down by just 6 per cent this year, continues to be seen as a takeover target, although, with a market capitalisation of £21billion, it would scarcely be an impulse buy. As Gavin Launder of Legal & General Investment Management (LGIM) points out, Tesco and Sainsbury should benefit as people economise by eating out less. 

Clive Black of Shore Capital says the duo have learnt lessons from the pandemic which forced them to develop their online operations. They also gained valuable experience from the global financial crisis when both lost out to the privately-owned Aldi and Lidl. 

The straitened circumstances of many families will lead them to trade down to Aldi and Lidl. But the fightback against these discounters has already begun. Sainsbury’s has an Aldi price match and Tesco offers savings to Clubcard holders. 

Alexandra Jackson, manager of the Rathbone UK Opportunities Fund, which holds Tesco, says that the Clubcard pricing strategy is driving customers into Tesco stores, but also providing crucial data on shifts in consumer preferences. Her assessment highlights the intense scrutiny now being targeted at how shoppers could behave in the months ahead. 

Black says: ‘Not every household will be counting pennies. Some will be able to rely on their lockdown savings.’ 

Launder, who manages LGIM’s Sustainable UK and Future World Sustainable UK Focus funds is holding stocks that he considers could be less hard hit. 

He says: ‘Retailers, like Boohoo and JD Sports with a bias towards young consumers should fare relatively better. Luxury goods companies still have long waiting lists for items like Rolex watches, which leaves Watches of Switzerland well placed. Pet food and pet care are largely immune to trading down, putting Pets at Home in a very strong position.’ Another trend in the lockdown period was a determination to make our homes more comfortable. Dunelm, whose shares are down 20 per cent since the start of the year, should be able to offer value to households bent on even more domestic refurbishment.

Kingfisher, owner of B&Q, also provides the wherewithal for inexpensive makeovers. Although the group may have scored a £1billion pre-tax profit in 2021, its shares are 24 per cent lower than in January thanks to a recent weakness in sales. But it may be worthwhile to stick around for the share buybacks and the potential of the company’s ecommerce drive. 

B&M has yet to become an online retail star, although this should be the ideal route to capitalise on its 1.4m Instagram followers. But this discounter should still be perfectly placed to make the most of circumstances. 

But investors in retail stocks should bear in mind that late last year B&M boss Simon Arora and his brothers sold a 4 per cent stake in the company. To some observers, this move indicated that they recognised the difficulties that lay ahead. These challenges have multiplied, meaning that a bet on retail now requires courage.

This post first appeared on Dailymail.co.uk