Turkey of the week: retailer more exposed than most

By Tim Price Aug 22, 2008

Tim Price

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When it comes to specific sectors, retailing in Britain has fallen off the ugly tree and managed to hit every branch on the way down. The macro backdrop could hardly be more negative. British mortgage approvals in June were at their lowest level since 1993, while UK retail sales were down almost 4% in June, their biggest monthly fall since 1986. And this week's gamble is the most exposed name in the sector.

Home Retail Group plc (HOME), rated REDUCE by Ramona Tipnis at Oriel Securities

Home Retail Group is the UK's second-biggest DIY retailer and number one in non-food retailing with Argos. Fund manager Jeremy Grantham of GMO recently suggested that UK house prices need to fall a further 38% (or stay flat for seven years) to reach fair value. That presumes that house prices don't overshoot on the downside as they have done on the way up. Either way, the housing market looks toxic.

And homeowners are not the only ones exposed. With fewer people moving home or having the resources to spend more money on the high street, DIY, furniture (Home Retail is number one here too) and electricals (where it is number three) are all vulnerable to a sickly consumer. Home Retail Group is also awkwardly positioned in the UK domestic market. It derives 100% of its revenues from British business and so, unlike rivals such as Kingfisher, has no international exposure that might hedge the worst effects of the UK downturn.

Ramona Tipnis of Oriel Securities has a fairly bleak take on prospects for Home Retail Group, in a recent note entitled 'The outlook is worsening'. The firm's trading statement of 12 June "highlighted a weaker than expected performance, with much of it allegedly attributable to fluctuations in weather conditions" (blaming the weather has always been the last refuge of the retailing scoundrel). "This would suggest that the weakening consumer outlook has yet to take a grip." In other words, it's not too late to sell. As Ramona points out, Home Retail is now facing "one of the worst consumer slow­downs since the late 1980s/early 1990s... with the outlook deteriorating, these falls could be seen as the start of a trend".

Home Retail Group's net dividend yield of just under 6% looks attractive on the surface, but that assumes that the dividend is secure. Its current p/e ratio languishes at around seven times, which might even be racy for such a cyclical stock.

According to Bloomberg analytics, 24 brokers cover Home Retail Group. Eight of them rate the stock a 'Buy', with 11 maintaining coverage at 'Hold' and five, including Ramona, considering it an outright 'Sell'. The stock has fallen by a third since the start of last year, but has actually outperformed the FTSE General Retailers Index over the same period. The firm next reports on 11 September. Don't expect good news.

Recommendation: AVOID

Tim Price is director of investment at PFP Wealth Management. He also edits The Price Report investment newsletter. Find out more about The Price Report here.

Paul Hill is away.

Published in Tips & advice | More articles by Tim Price

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