Jeremiahs crowd the UK high street

The archetypal Jeremiah wandering high streets with “the end is nigh” painted on a sign is more cheerful than most shopkeepers at the moment.

After years of consumer-led growth, non-food retail chief executives are in the doldrums. Sales are falling, consumer confidence is non-existent and share price performance is best not mentioned.

Remarkably, though, some of the gloomiest equity strategists say we may soon see some bargains in the sector. With the 12-month share price performance at its lowest level in 30 years, the theory goes that things cannot get much worse for retail, at least from a share price perspective.

Graham Secker, of Morgan Stanley, is one formerly bearish analyst – “it feels like we’ve been negative on this space forever,” he says – going through a “big change” of heart.

A moderately upbeat research report from Mr Secker yesterday helped lift the sector.

“We believe we are getting close to the trough for retailers’ share price performance and recommend that investors consider closing shorts,” the report said.

“In the last recession, the sector troughed at the same time as consumer confidence bottomed; the latter could easily happen in the next quarter given the cacophony of bad news flow seen in the last few weeks.”

The argument is that while things are bad, they may not be quite as bad as share prices indicate.

Retail has underperformed the wider market by 30 per cent in the past year and the era of cheap money – as used on the £12.4bn acquisition of Alliance Boots – has come to an end.

“The fundamentals for the consumer do not look good,” says Mr Secker. But he believes a sector price/earnings ratio of about 9 based on the most recent financial results, also the lowest level in 30 years, means a high risk, high return bet on a share price recovery could be tempting, especially as dividend yields also look attractive.

It is a suggestion strongly disputed by one of Britain’s leading retail executives, who declines to be named.

“How could you possibly be calling the retail sector? Absolutely impossible. Nobody at the moment can tell you where the revenue line is going.”

The executive, whose views are shared widely by his peers, predicts that “most of the high street will be on sale at the end of June”.

He says that a poisonous mix of rising costs for both the consumer and retailer – from the minimum wage, stronger euro and inflation in China – is contributing to a malaise that shows no sign of lifting.

It is not surprising that corporate restructuring specialists are hovering.

“We’re going to see a ‘right-sizing’ of the retail market,” says Robin Knight, a director at Kroll, sounding a slightly chilling note for the industry.

MK One, the discount fashion chain, lapsed into administration this year after it was sold by Baugur, the Icelandic investment group, to Hilco, a retail restructuring specialist. After the sale, it was quickly placed into administration and the bulk of the business sold to the company’s founder, Mark Brafman.

The MK One model, with beleaguered store chains quickly being transferred to different ownership rather than disappearing permanently, is a pattern many in the restructuring business believe will continue.

“We will see insolvencies but lots of retail phoenixes that just reappear,” says Mr Knight.

At the other end of the spectrum is John Lewis, a department store chain that likes to think of itself as different.

It is a much-loved fixture in the lives of many middle-class families, offers better service than the competition, is owned by its workers and regularly outperforms the competition.

Except that it is no longer quite so different.

Trading at the chain last week was poor. The consumer gloom has hit the retailer that previously could do little wrong.

Sales fell for the third consecutive week, by 2.8 per cent in the week to May 24. This was better than much of the high street but, at £44.3m, the worst performance in two years at John Lewis during this period.

“We are in a customer downturn,” says Dan Knowles, director of selling operations at John Lewis. He highlights a GfK/NOP poll published yesterday that shows British consumer confidence in May at its lowest level since 1990.

“Pretty sober reading,” he says.

Different areas of retail have reacted differently to the incipient downturn. Drinkers are not yet forgoing their favourite tipple and drivers who can afford to fill their tanks will continue to buy new wiper blades too. Therefore, Halfords and Majestic should weather the downturn relatively well.

And for Mr Secker and other softening bears, the gloomy consumer data do not rule out retail shares being too cheap. His evidence includes the fact that retail stocks reached their nadir in the early 1990s, when house prices started to fall, rather than later on in the downturn.

Regardless, for those on the retail front line, such as Sir Stuart Rose at Marks and Spencer and Sir Philip Green at Arcadia, there is far less optimism.

They may be wearing suits rather than sandwich boards, but the message is clear: the end is not nigh, it has arrived.