The one retail share worth buying
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Associate Editor
David Stevenson Jul 02, 2009
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Retail stocks: not many are worth buying
Marks & Spencer is the classic British retail bellwether.
Marks' performance often tell us more about what's really happening on the high street than all the official consumption statistics rolled into one.
So when the company says that its last quarter sales drop was the smallest in almost two years, you might think that an upturn for general retailers is just around the corner.
So is it time to pile into retail stocks? Sadly not, as we'll explain in a moment – but there is one retailer you should be buying…
Marks isn't doing as well as it seems
Marks & Sparks has already been hit quite hard by the recession. Six weeks ago it reported a near-40% plunge in annual net profits and a one-third cut in the final dividend. But on reading yesterday's statement you could be forgiven for thinking that the company's well on the way to turning the corner.
Group sales for the 13 weeks to 27 June were up 2.9%, including a 1.7% rise in the UK. And there was some upbeat talk from chairman Sir Stuart Rose, who saw an "improved performance in all areas of the business", though he hedged his bets by remaining cautious on the outlook for the rest of the year.
But the devil is in the detail. And this shows that like-for-like sales, i.e. excluding new store openings, actually fell 1.4% - the seventh quarterly sales fall in a row. Within that number, turnover in 'general merchandise' slid by 2.4%. What's more, profit margins took a hit, as M&S had to cut prices to compete.
The company's mild optimism may reflect the fact that the state of the wider economy is deteriorating more slowly. But that's not the same as an improvement. And as we said in Tuesday's Money Morning (Why the recession is nowhere near over), whatever the optimists would have you believe, Britain's recession is nowhere near over. Indeed, as this week's terrible GDP revision showed, it's "even deeper than previously thought", says Jonathan Loynes of Capital Economics. And we can't expect a rapid rebound, even when the recession does technically end.
More bad news for retail stocks
Britain's banks can't even dream of lending at the levels we saw two years ago, because their balance sheets are still so frail after all their previous ill-judged lending. This week's Bank of England data showed that net lending to individuals has slowed to a crawl, up a tiny 0.1% during the three months to the end of May. Within that, consumer credit grew by just 0.2% over the quarter.
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In other words, shoppers who've already maxed out their credit cards are running out of financial ammo. And many would now prefer to repair their own balance sheets and repay their debts, rather than incur new ones.
And help from the housing market is also about to end. Equity release – borrowing against rising house prices – has long been the cashpoint used by consumers to fund their retail therapy. That was shut down as property values started to tumble. But in its place, many homeowners' incomes have been boosted by lower home loan costs, as the Bank of England slashed rates. But this extra supply of cash can't be relied on – the next move in rates, whenever it may come, is bound to be higher, simply because they can't go any lower.
If you're still not convinced, just take a look at what the commercial landlords think about prospects for the sector. Property consultants Colliers CRE reckon that between now and the end of next year, retail rents are set to dive by almost a fifth. That's a nightmare for commercial property firms – but it also shows just how little confidence they have in the amount of money that their tenants, the shopkeepers, are going to have to pay the rent.
Of course, if you're a regular MoneyWeek reader (if you're not, get your first three issues free here), there's not much chance you'll still be an M&S shareholder – you'll have sold the stock ages ago. But having plummeted almost 75% from their highs of just over two years ago to a March low of 200p, the shares have since recovered to 318p. If you do still have some left, this could be the time to unload them.
The one share worth buying
And if you want to replace M&S, there's a much better bet available right now. Tesco (LSE: TSCO), which is still mainly about food which we'll need, recession or not – it takes every third pound spent in British supermarkets - just keeps growing.
Saying that any business is recession-proof is always tempting fate. But last month's trading update showed that like-for-like turnover for the quarter to the end of May climbed by 4.3%. And international sales are going gangbusters, up 20% over the period.
What's more, compared with both its historic valuation and price, Tesco is about as cheap as many of the company's products. Dragged down by the overall market, the shares are more than 25% below their peak of 18 months ago. And on a p/e ratio of just 12x for the current year, falling to 11x forecast earnings for 2010, the stock sells on less than half its valuation of eight years ago. There's even a 3.4% yield to ice the cake.
If any retailing share is worth holding at the moment, Tesco surely has to be it.
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