There is panic on the high street. Just four shopping days left until Christmas and prices are being cut left, right and centre. In the UK, Marks and Spencer is offering cut-price gifts and clothing discounts. In the US, discounting is widespread – Sears and JC Penney are among those cutting prices. While in France, Galeries Lafayette has extended its offers. This is not how it is meant to be. Surely there should be no better time to be a retailer than Christmas during an economic recovery.
As is ever the case when shopping, it is worth keeping a cool head. This sort of behaviour, margin sapping though it may be, is not unusual. According to PwC, 72 per cent of UK high street retailers have had promotions this week. But that is less than the level at this time last year. Some of the price cuts have been driven by mild weather, which has left retailers with too much stock. In the US, the National Retail Federation expects holiday season sales to grow a little less than 4 per cent this year. That is not exactly a bonanza, but it is ahead of last year’s rate and the 10-year average.
The big picture is also encouraging. In the UK, for example, Deutsche Bank is forecasting a 3.9 per cent increase in discretionary disposable income in 2014, against a 2.5 per cent rise in 2013. US retail sales are also trending up. Shares across the sector have had a recovery priced in over the past year. The Stoxx Europe 600 retail index is up 16 per cent, while the Dow Jones US retail index is up by twice that. Both have outperformed their benchmark indices. Those rises have not always been matched by a rise in earnings forecasts, so valuation multiples have grown.
Retailing is all about individual taste and the sector is a gem for stockpickers. JC Penney and Marks and Spencer are among those hoping that Christmas will be the start of a turnround. The former is expected to be lossmaking for years while the latter, on 13 times earnings, has yet to convince the market that better times are ahead. Expansionist twins H & M and Inditex offer a more secure way into growth but, on 25 and 26 times earnings respectively, it is hard to see higher valuations for either. Happy shopping.
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