Retail rally halted by bout of profit taking

Following the sector’s rally, which has lifted its value by almost a third over the year, investors seemed minded to cash in. However, Pali International analyst Nick Bubb was confident that retailers’ popularity would be restored.

He said: “The fact is that confidence is rising on the high street, and with nearly every non-food retailer now getting excited about how the comps get so easy this autumn, we doubt if the recent spell of profit taking will last long.”

Hold Next, advised KBC Peel Hunt following better than expected first-half results. The broker is reviewing its target price, forecasts and recommendation and said: “Next continues to trade on an undeserved discount to its peers. Cash generation remains impressive and Directory offers good margin protection in a tougher trading environment.”

Buy Morrisons, recommended Jefferies, noting that the supermarket group emerged as the “main winner” from the latest grocery market data. The broker acknowledged that Morrisons is unlikely
to continue to outperform to the same extent as it has done, but maintained: “Given strong margin potential, an underleveraged balance sheet and undemanding rating, this is not required.”

Argos and Homebase owner Home Retail Group was the biggest faller of the week. Analyst opinion was divided after last week’s update. ING stuck to its sell advice and flagged “fundamental gross margin concerns”. Investec advised buy and said that “notwithstanding company guidance to higher gross margin erosion at both divisions”, the consensus forecast will rise from about £222m to between £250m and £260m.

After topping the list of retail risers the previous week, Sports Direct was one of the biggest fallers after it emerged that the OFT and Serious Fraud Office were investigating it and JJB over competition concerns. Numis cut its Sports Direct target price from 145p to 130p, but maintained its add recommendation. The broker said of the OFT inquiry: “We believe that Sports Direct could be faced with a maximum possible fine of 10% of turnover – approximately £150m. With precedents suggesting that an acceptance of liability would result in a 50% reduction in any fine, we believe the fall in the share price is overdone.”

Former US vice-president Al Gore’s investment fund has taken a stake in online grocer Ocado as part of a £50m fundraising by the retailer. The cash will enable Ocado, which is not yet profitable, to continue expanding. It has ambitions to float, possibly as early as next year.