- UK high street enduring
- Low ticket leisure a winner
- Value retail showing resilience
Many have sounded the death knell for the UK high street, notably during the Covid crisis as retail trends shifted towards online shopping. Yet, the high street has endured amid the consumer’s persistent demand for physical retail.
And despite many high street stocks successfully adapting to this evolving retail market, valuations remain depressed, presenting a value opportunity for some UK fund managers so long as consumer sentiment improves.
VALUE DEMONSTRATING RESILIENCE
Brendan Gulston, co-manager of WS Gresham House UK Multi Cap Income Fund (BYXVGS7), explains: ‘The composition of the UK high street has evolved significantly over the past five years, with Covid-19 acting as a major catalyst, alongside inflationary pressures, reduced consumer confidence, and other macroeconomic challenges. However, certain pockets have been well insulated and delivered strong operational performance, such as companies on the right side of structural growth drivers or those with resilient propositions and defensive characteristics.’
Gulston points out that ‘low ticket experiential leisure has been a category winner, taking wallet share from other business models like larger ticket discretionary’.
Companies such as Hollywood Bowl (BOWL), the UK and Canada’s largest tenpin bowling operator, exemplify this trend, says Gulston.
He also highlights hobbyist and enthusiast propositions as another strong area. For instance, Angling Direct (ANG:AIM), the UK’s leading fishing tackle and equipment retailer, benefits from a loyal hobbyist customer base.
Being the UK’s leading multi-channel fishing retailer, Angling Direct is also benefitting from ecommerce trends, says Gulston.
‘Value-driven sectors have also demonstrated resilience,’ he explains. ‘B&M European Value Retail (BME) and 3i (III), through its investment in Dutch discounter Action, have continued to deliver strong operational performance, with growth in average basket sizes and ongoing store rollout. Their value-oriented propositions have resonated with consumers, particularly in the current challenging economic environment.’
TJX TREASURE HUNT
Another high street name that continues to deliver the goods is off-price retailing star turn TJX Companies (TJX:NYSE). For the uninitiated, ‘off price’ is a discount pricing format, whereby a retailer purchases excess stock from known brands and sells it on to the end consumer at a lower price.
In Europe and the UK, TJX’s well-known local brand, TK Maxx, sells branded goods at massive discounts, encouraging consumers to embrace the ‘treasure hunt’ format, exploring the store for bargains.
Bulls of the company insist changing shopping habits and the digitalisation of retailing are working to TJX’s advantage.
As brands scale back their physical presence, they need different ways of distributing products, and TJX is benefitting disproportionally from that, as a trusted, consistent buyer. Its stores have a steady presence on high streets that increasingly feature just a few speciality retailers.
While physical stores are expected to always make up the bulk of TJX’s revenues, it has invested in an e-commerce strategy to ensure it has exposure to those customers who will only ever shop online.
FundCalibre’s managing director Darius McDermott, says the UK consumer outlook isn’t as pessimistic as some would think. And given the domestic focus of UK retail stocks, he believes small and mid cap funds often offer the best investment opportunities in this sector.
TM Tellworth UK Smaller Companies (BDTM8B4), for example, allocates over 20% of its portfolio to consumer discretionary stocks. Card Factory (CARD), a leading greetings card retailer targeting value-conscious consumers amid rising living costs, is a notable holding.
‘Montanaro UK Income (BFFK9L3) also has significant consumer discretionary exposure,’ observes McDermott, ‘with Greggs (GRG) and Games Workshop (GAW) among its top holdings. Games Workshop, the tabletop games and miniatures retailer, and creator of Warhammer, has tapped into the lucrative hobbyist market with its strong community-driven brand. Greggs, meanwhile, has transformed from a local favourite to a national success story, thanks to effective marketing, innovative “value-for-money” products, and an understanding of evolving consumer preferences.’
