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Last updated: March 9, 2009 11:28 pm
While some of Britain’s best known retail names have crashed into bankruptcy, something strange has happened: retail stocks have rallied.
The FTSE All-Share General Retailers index has jumped 20 per cent from a mid-November low, though the broader market has retreated 5 per cent. Marks and Spencer, Next, and Kingfisher are up about 20 per cent, Debenhams 60 per cent, and DSG International more than 80 per cent. The sector’s forward price/earnings ratio has stretched to a 16 per cent premium to the market. This looks premature.
Non-food retail usually prices in recovery early in a downturn and, given that the pace at which analysts are downgrading retail earnings forecasts is slowing, investors are determined not to miss the turn. That Christmas sales were less disastrous than feared – though rescued only by margin-crunching price cutting – boosted confidence. There are some brighter prospects ahead, too. For consumers who keep their jobs, 4.5 percentage points of base rate cuts since September and falling energy prices should, belatedly, start boosting disposable income.
But hold on. Job losses are only now spreading beyond finance and retail. Employment jitters may tempt consumers to use mortgage and utility bill savings to build a cash safety cushion – in spite of lousy rates for savers. Early indications suggest February retail sales were rotten and the housing market remains moribund.
An even bigger pitfall looms for clothing and general merchandise retailers in sterling’s slide. Many now source heavily in dollars from Asia. Their hedging mostly expires by the second half of 2009, leaving them facing higher sterling prices. Freight costs have fallen and overcapacity among suppliers may help retailers extract better deals. But that will not cover all the currency impact, so retail chains still face margin hits or the need to pass on higher prices – at a delicate time. Hold off from a retail stock shopping spree for now.
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