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Retail sector: Time for traders to get tactical in stock picking

16:52, 24 June 2022

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  • AMZN
    Amazon
    142.96 USD
    -0.63 -0.440%
  • BABA
    Alibaba
    94.26 USD
    -1.93 -2.040%
  • EBAY
    eBay
    48.72 USD
    -0.77 -1.560%
  • TSCOl
    Tesco
    2.6680 USD
    0.032 +1.220%

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man and women window shopping
Are all retail sector stocks are risk? - Photo: Getty Images

Undoubtably as inflation persists, consumers try to shop less in order to cut costs. For retail traders this can mean portfolios seeing a loss in value. However, not all areas of retail have been behaving the same, and there are opportunities for careful investors to find what they are looking for.

As consumers start to focus on budgets, they are likely to look towards cheaper options for necessary products, giving stocks like Tesco (TSCOI) and Walmart (WMT) some downside protection.

An area that seems completely unphased by the rise of inflation is the luxury retail, with companies like Louis Vuitton (MC) and Hermes (RMS) managing to keep their revenues growing due to the ability of their customers continuing to afford their products.

Tesco (TSCOI) Price Chart 

Since the pandemic, consumer behaviour has changed, with more now preferring to shop online. Thus, stores which high online presence may well be able to sustain their revenues during inflationary times.  A trend already seen with Amazon (AMZN) and Alibaba (BABA)

Investors need to carefully study midrange retail companies like Marks and Spencer (MKS) and Ted Baker (TED) as their products don’t necessary have inelastic demand.

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Drop in sales

With the cost of living persistently on an incline, it is not surprising to see retail sales numbers dropping across the board.  According to the Office of National Statistics, retail sales numbers in the UK fell by 0.5% in May 2022. The three months leading up to May also saw 1.3% lower sales than 2021.

It was a similar story in the US, where retail sales numbers declined by 0.3% in May 2022 as stated by the US Census Bureau

Danni Hewson, AJ Bell financial analyst, tells Capital.com “Investors are wary even though many stocks look cheap and most will wait until the dust settles before considering buying what looks like a pretty deep dip.”

 

The exceptions

Even in these circumstances. There are pockets of the retail sector which may fare well in the coming months.

1. Low cost staples stores

As consumer budgets become tighter, there is likely to be a trend of people buying the cheaper option of the same products. Low cost consumer staples stocks such as Walmart (WMT) and Tesco (TSCOI) have already seeing their valuations rise in the past week. Both companies continue to see growth in their revenues.

Hewson agrees but adds a warning:  “There are plenty of examples of people 'trading down' in a bid to save cash and discounters do stand to gain from that switch but those businesses will have to be fleet of foot to keep prices low which is expected to eat into margins.”

She adds that some of the higher-risk businesses are the mid-range ones: “ The big risk is likely to be found in the middle and stores like Ted Baker (TED), Marks and Spencer (MKS) and even Next (NXT) will have a fight on their hands.  But the second two have a distinct edge because of their mix of customer, brands, commodity and their hybrid set up.”

Walmart (WMT) Price Chart

2. Online retail

People’s shopping habits have definitely changed since the start of the pandemic in 2020, when ecommerce shops all saw a spike in revenues. Amazon (AMZN), Alibaba (BABA) and eBay (EBAY) all continue to grow their revenues based on most recent earnings report.

A consumer survey report by Deloitte finds that people preference have changed the report states “Even in our recent back-to-school and holiday studies, consumers indicated that though they feel more comfortable returning to stores, their preference for online channels remains higher than before the pandemic."

The report also finds that retail executives have also realised the importance of online presence, 70% of them say that they plan to make major investments on digital marketing.

However online stores need to be careful as there are some recently emerging trends that appear to show a slowdown of growth. Online clothing retail stores ASOS (ASC)  and Booboo (BOO) both recently announced that they are seeing higher product return numbers than before.

Hewson comments:  “Online only really needs to find a way to keep costs to a minimum, returns are an issue and staffing costs have now become the number one headache for all businesses.”

“Online looks to be an obvious danger point because it’s lost the edge it had when high street rents were cripplingly high, but if people can’t get out to enjoy the mix of retail and hospitality because they don’t have the cash to spend on travel or parking those businesses might find they get another lockdown like boost”

Amazon (AMZN) Price Chart

3. Luxury

The rise in the cost of living does not affect all consumers the same. Luxury retail customer behaviour is unchanged during the recent periods of inflation.

After suffering a drop in sales numbers during 2020, the sector was resilient enough to pick up pace. Savills research finds that rate of new store openings recovered almost fully by 2021 back to pre-pandemic levels.

The following luxury stocks all grew their revenue numbers in 2021, to higher than 2019 levels:

  • Louis Vuitton (MC)
  • Hermes (RMS)
  • Capri holdings (CPRI): the owners of Michael Kors
  • Kering (KER): the owners of Balenciaga, Bottega Veneta, Gucci, Alexander McQueen and Yves Saint Laurent

Hewson comments  “Luxury stocks have had a great start to the year and their outlooks are pretty rosy because their consumer is simply not phased by the rise in prices.  Inflation isn’t making much of an impact on the mega rich which means high end brands can pass on price rises without losing sales”

Louis Vuitton (MC) Price Chart

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