Although food groups held up for most of last year – partly on the back of the bid speculation that embroiled Sainsbury’s and to a lesser extent Morrisons – general retailers’ valuations plummeted.
Many brokers are bearish on the sector, fearing that the combined impact of the credit crunch, shaky housing market and fragile consumer confidence will be felt for some time yet. Brokers will be anxiously watching trends in the hope of being first to call a general upturn. Landsbanki analyst Paul Deacon said: “I think the sector will bottom out. The issue is what depth of downturn one can expect.
“If it’s deep, you generally want to stay in defensive stocks. If it’s what you might call a normal downturn, you’d want to be at the more cyclical end.”
So which stocks might provide a port in the storm and be worth taking a risk on in 2008?
Pali International’s Nick Bubb recommended one of his long-standing favourites, WHSmith. “It’s clearly defensive in its business profile and has ways of unlocking shareholder value,” he explained.
Bubb likes the fact that chief executive Kate Swann and her team, who have delivered an impressive turnaround over the past few years, have attractive incentives in place that are likely to prompt continued success.
He also cited the strength of the retailer’s travel division as an attraction, which may lead to corporate action. “Either they [the management] look at ways of unlocking the value of Travel or someone else will come in and do it for them,” argued Bubb. “Maybe the company will be broken up by this time next year.”
Although home shopping companies were harshly marked down as the credit crunch bit, the sector offers value, believes Shore Capital analyst John Stevenson.
He chose N Brown as a “safe call” on a likely outperformer. “It was hit hard on the credit crunch, but trading has been quite strong, they’ve got a niche and there’s scope for upgrades,” said Stevenson.
Kaupthing analyst Matthew McEachran alights on Mothercare as a winner in 2008, because of opportunities at home and abroad. “The integration of Early Learning Centre into Mothercare UK should show some benefits in 2008,” he said. “Internationally, there are two things going on – the launch of China and acceleration of growth in markets like India.”
Blue Oar Securities’ Ian Macdougall opted for homewares group Dunelm, which took a pummelling late last year. He likes the retailer’s value credentials, low transaction value, growing power in a fragmented market and out-of-town locations. “It also has a low cost model, which has delivered the goods so far,” he said.
The outlook in 2008 may still be tough for retailers, but analysts remain convinced there is value to be had and there will be winners as well as losers.
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