Two stocks set to profit from retailers’ woes

By Associate Editor David Stevenson Dec 14, 2009

David Stevenson

Share with
friends:

Comments (4) Print this article

“The worst insolvencies in the UK are yet to come”.

You won’t be surprised to hear that this statement didn’t figure in the Chancellor’s head-in-the-sand Pre-Budget Report last week.

No, it’s from a specialist accountant who’s taken a long hard look at the numbers for the high street, and doesn’t like what he sees. Next year will be miserable for retailers. Perhaps even worse than 2009.

But smart investors can still profit from the retail sector. We’ll show you how in a moment...

Things are getting worse for retailers

Despite the recent upswing in UK house prices and the latest stock market surge, there’s not too much good news around in the real world, as we pointed out in Friday’s Money Morning: Three signs that stocks are about to start sliding again.

In fact, on the ground, things in Britain are actually getting worse – at least for those parts of the economy dependent upon consumer spending. More companies are in trouble now than a year ago. And that could spell a very nasty start to 2010 for the retail sector.

If you’ve ever worked in general retail, you’ll know that the pre-Christmas ‘golden quarter’ is when shopkeepers ring up a large chunk of their sales and profits for the year. If the last three months of the year are poor, it can mean big cash flow problems in the New Year.

Much of your Christmas stock, which you probably managed to buy on 30- or 60-day credit terms, will then have to be paid for. And although everyone knows that January and February trading can be dire at the best of times, your landlord will still be demanding his quarterly rent payment in March. So if you don’t manage to stuff the tills with cash before Christmas, you’re in trouble.

So how is this Christmas shaping up for retailers? Well, the latest British Retail Consortium survey made pretty gloomy reading. November sales were up by only a ‘disappointing’ 1.8% compared with last year. That might sound OK, but don’t forget that in November 2008, everyone was still panicking about the collapse of Lehman Brothers and reining in their spending.

So really, if there’s any sign of recovery, the annual growth rate should have been a lot stronger. But in fact, “consumer confidence is fragile, and has taken a turn for the worse”, says BRC director general Stephen Robertson.

What’s more, the number of UK retailers facing “significant or critical financial difficulties” over the quarter to early December is already up 5% on last year, insolvency specialist Begbies Traynor tells The Telegraph. “That’s remarkable in the context of last year, when there were high profile collapses across the UK’s high streets”, says Nick Hood at Begbies Traynor.

2010 could bring a killer blow to struggling companies

The trouble is that cash flow problems are cumulative. Anyone who’s got behind with regular payments will know just how hard it is to ‘catch up’ again. And this looks like being the key factor at end-2009. Companies that have just managed to struggle through this year may well find that 2010 brings the killer blow.

“More companies are in trouble, but fewer with life-threatening critical financial difficulties at this stage. This reflects creditors holding back in the expectation these businesses’ liquidity will improve as they turn stock into cash”, says Hood. In other words, no one wants to pull the plug ahead of Christmas, in the hope that companies make enough money to pay their bills in the New Year. But if they can’t, it’ll be curtains in January. “It’s a return to the traditional retail sector insolvency pattern when failures peak after and not before Christmas”.

Worse still, there are fewer white knights around this year, says Hood. “Last year, corporate bargain hunters were out in force and rescue funding was more plentiful. No such panacea for the ills of struggling retailers looks likely to be available this time round.”

In other words, you ain’t seen nothing yet. At the end of last month, the insolvency practitioners’ trade body R3 warned of a New Year “bloodbath” on the high street.

Special FREE report from MoneyWeek magazine: When will house prices bottom out - and how will you know?

  • Why UK property prices are going to fall 50%
  • When it will be time to get back in and buy up half price property

That makes a lot of sense. There have already been some high profile casualties, such as bookseller Borders. And a mix of more job losses, low pay deals and the return of VAT to 17.5% doesn’t bode well for many other stores. Many consumers are already over-loaded with debt, so they won’t be able to fund future spending through higher borrowings as before. Consumer credit is already shrinking, with the latest figures showing a 2.2% annualised drop.

Against such a backdrop, R3 doesn’t believe that retailers’ creditors will be very patient. The greater the risk they run of losing what they’re owed, the sooner they’ll pull the plug.

So when you hear ‘experts’ suggesting that things should be OK for general retailers next year, ignore them. The share prices of many ‘non-food’ retailers have bounced this year, but now looks a sensible time to take any profits you’ve made.

How to profit from retail next year

If you want to profit from retail next year, you’d be better off buying Begbies Traynor (LSE: BEG). Business for the insolvency specialist is already good. Insolvency work brings in over 80% of group revenues, and first quarter numbers are “significantly ahead” of the same period last year.

Stephen Thomas of Hardman & Co sees earnings per share rising 14% for the year to April 2010, and a further 17% to 10.4p for the year after. At 100p, that puts Begbies on a forward p/e of just 9.6, while the yield is around 3%. Thomas has a target price of 180p, 80% above the current price.

Alternatively, there’s Aim-listed corporate recovery specialist Tenon (LSE: TNO), at 48p. Justin Bates of Daniel Stewart has this stock on a current year p/e of 7, falling to just 6.3 for the year to June 2011. The current year yield is 3.5%. Daniel Stewart’s price target is 75p, 56% higher than today.

Comments (4)

Published in Tips & advice | More articles by David Stevenson

Share with
friends:

Related articles

Comments

Leave a comment

  • 1. G@Crechat

    (14 December 2009, 05:26PM)  Complain about this comment

    Investors should note that Tenon is a genral accounting practice and its insolvency activity is <25% of its turnover

  • 2. Ali G

    (17 December 2009, 05:10AM)  Complain about this comment

    I am a General Manager of a large taxi business.

    Restuarants and Hotels are struggling at present. So money is tight.

    Totally agree that people are wary and that it could all go belly up for many retailers in early 2010 due to cash flow issues.

    So Insolvency Specialist Stock makes sense to me to put some of your hard earned into.

    A even better bet than Kauto Star in the King George V at Kempton on Boxing Day! Horses can only fall!

  • 3. Hackenbush

    (07 January 2010, 03:13PM)  Complain about this comment

    BEG.L was recommended a while back (when shares were 119p) by Fleet Street Letter, then the shares went nowhere and FSL said, in effect, still a good company but cut your loss and invest elsewhere. Somewhat surprised by this turnaround in their usual bearish attitude I held on and now they are creeping back up again. Dividend yield at 3% is not world-beating, but should be good for share price growth as the article above says. I'm still holding on.

  • 4. David Kalley

    (16 January 2010, 09:49AM)  Complain about this comment

    I think Begbies Traynor could be a very good long term buy, I was very impressed to learn that director : Richard Traynor at 105p a share - holds a little over £28 MILLION in Begbie shares.
    I dont believe a succesful, intelligent, businessman would make that level of a commitment, unless he's pretty certain that his money is safe.
    To me, when somebody puts his money where his mouth is, thats a far better buy recommendation than a worthless tip from a brokerage firm.

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>