UK retail stocks appear to be turning the corner in the new year after a dismal 2022.
(Bloomberg) — UK retail stocks appear to be turning the corner in the new year after a dismal 2022.
JD Sports Fashion plc and J Sainsbury plc on Wednesday joined UK online shopping bellwether Next plc and small retailer Card Factory plc in providing a more upbeat outlook, potentially extending a surprise rally in consumer stocks. JD Sports shares jumped as much as 6.5% in London trading.
Next shares have led rebound, with the FTSE 350 retail index jumping 9.4% so far in January after having lost a third of the value last year. While UK consumer spending remains bruised by the ongoing cost-of-living crisis, analysts are starting to anticipate a slowdown in inflation and recovery in living standards later this year.
More retailers, including Marks & Spencer Group plc, Asos plc and Tesco plc, are due to report results this week, testing renewed appetite for such stocks. Next has led the way, noting an unexpected rise in full-price sales and surge in demand for winter clothing, while JD Sports and Sainsbury both said they see earnings toward the upper end of guidance.
“Maybe there is light at the end of the tunnel,” Shore Capital analysts Clive Black and Eleonora Dani wrote in a note. The update provided by Next was a “positive stake in the sand,” even as the amount of initial optimism it generated remains a bit of a surprise, they said.
The last year has been a turbulent one for the retail industry, as companies were hit by rising input costs at a time that consumers saw their disposable incomes drop due to surging prices and loan costs.
Sainsbury said profit will be boosted by a jump in third-quarter sales as shoppers spent more over the festive period. Britain’s second-largest grocer expects an underlying profit before tax toward the top end of a range of £630 million ($766 million) to £690 million after a record Christmas driven by higher prices and volumes.
JD Sports said it saw a “particularly impressive” performance in its retail businesses through Christmas and expects headline group profit near the top end of current market expectations, which range from £933 million to £985 million.
‘Better Visibility’
Over the last four quarters, only WH Smith plc gained from constituents of the the FTSE 350 retail index, albeit by just 0.3%. The latest surge has taken relative valuations of the retail sector to the broader UK market above its 15-year average, showing a 16% premium.
Shore’s Black and Dani said that Next provided “comfort” as the retailer outlined expectations of cost inflation peaking at 8%. While the next two months will be challenging for households, the analysts anticipate consumer inflation to slow to between 3% and 5% by the end of 2023.
“By the end of the current year, with UK wage inflation mid-to-high single digit in a still tight” job market “domestic living standards could be rising,” they wrote in the Jan. 6 note. “Better visibility around cost of goods and the prospect of a potentially stronger Christmas 2023 with a follow-through” into 2024 are seen as positives, they added.
The focus on the silver lining for retailers is different to the cautious views expressed by analysts in the run up to Christmas.
–With assistance from Joe Easton, James Cone and Michael Msika.
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