- Broker prefers multichannel retailers to online pure plays
- Consumer proving more resilient than feared
- DFS, ASOS and Boohoo look vulnerable, says broker
Retail share prices rallied last week following strong Christmas trading updates from clothing-to-homewares giant Next (NXT), variety goods discounter B&M (BME) and value sandwiches-to-sausage rolls seller Greggs (GRG), with the hard-pressed consumer proving more resilient than feared amid full employment and a return to post-Covid normality.
Stepping up with festive updates this week are JD Sports Fashion (JD.), one of Shares’ 2023 stock picks, as well as DFS Furniture (DFS) and ASOS (ASC), with the latter’s online fast fashion rival Boohoo (BOO:AIM) set to report next week.
WILL JD SPORTS DELIVER?
Based on last week’s upbeat missives, it is trainers, tracksuits and leisurewear seller JD Sports which Shore Capital sees as ‘the best positioned to report a positive trading update’ when it announces on 11 January, the broker also taking encouragement from strong second quarter results from JD’s key sneaker supplier Nike (NKE:NYSE).
‘Overall, stronger consumer demand than feared will support top lines of consumer companies but, in our view, the shares of multichannel businesses will perform better compared to online pure peers,’ write analysts Eleonora Dani and Clive Black in their latest UK retail and consumer note.
‘We continue to prefer multichannel business models over pure plays, in particular JD Sports until inflation peaks,’ add Dani and Black, highlighting Lord Wolfson-led Next’s intention to increase prices by high-single digits in 2023.
WHO LOOKS VULNERABLE?
While best-in-class retailer Next is able to completely pass-through cost inflation to consumers, Shore Capital warns ‘not many businesses will be in a position to do so; hence our cautious stance on ASOS, Boohoo and B&M’.
The brokerage sees ‘big ticket items and online as more exposed to reduced discretionary spend’, hence its sell’ rating on ASOS, lukewarm ‘hold’ recommendation on Boohoo, and concerns around sofas seller DFS. ASOS reports on 12 January, DFS on 13 January and Boohoo on 16 January.
DID WEATHER AND DISCOUNTS FLATTER DEMAND?
Shore Capital also argues that a mixture of retailers’ ability, luck and deep discounting are behind the unexpectedly positive consumer demand reported thus far.
‘Specifically for Next, its promotional rationality, timely cold weather and improved trading conditions year-on-year (stock availability and no Covid-related restrictions) have weighted in the retailer’s favour.’
Supply chain pressures and commodities cost inflation are easing and the broker points out retailers should have cleaner inventories in 2023; in Nike’s case, inventory clearance was behind its exceptional second quarter performance.
However, Shore Capital warns employment levels are another question mark hanging over the retail spending outlook. ‘Recent layoffs in the tech and e-commerce sectors, while understandable and perhaps needed given the high level of hiring over the past years, might only be the start.’
