Analysts confident the only way is up for retail shares

Broker Investec surveyed prospects and, while acknowledging the risks to retail performance, maintained the industry is operating against “a more benign backdrop than that suffered in 2008 and 2009”.

And while broker Espirito Santo cut its forecasts for 2013 it argued “the sector is trading close to its lows and we think the fall in equity markets presents a good buying opportunity for our favoured stocks”.

Investec analyst David Jeary pinpointed several factors likely to benefit retailers’ gross margin, operating costs and sales over the next 12 to 18 months.

He said: “On the sales front, while not a guarantee of better top-line performance, the sector is battling against weakening second-half comparatives. In terms of gross margins, tailwinds include stronger sterling reducing the cost of dollar-sourced products and cotton prices halving from recent highs.

“Finally, falling rents, more variable labour costs and channel shifting, with portfolio downsizing complemented by e- and m-commerce, should drive greater operating cost productivity.

“These factors should offer a higher degree of profit protection than was achieved in 2008/09.”

Espirito Santo analysts said retailers were trading on valuations close to the trough of 2008 but argued: “We do not expect downgrades on a similar scale because the retailers are prepared for a difficult environment, consumers are already in cautious mode and we do not see the development of an expectations gap that would cause a sharp deterioration in consumer confidence.”

Jeary said retailers least likely to be at risk of downgrade were defensive companies with lower operational gearing including Next, WHSmith and N Brown.

Retailers facing structural or cyclical problems, with higher operational gearing, such as Dixons, Gameand Home Retail, are at greater risk but he noted: “It should be remembered that operational gearing cuts both ways. Thus, upon a retail recovery, high operational gearing drives the biggest potential upside.”

Next is also one of Espirito Santo’s top picks, along with B&Q owner Kingfisher. The broker highlighted Kingfisher’s low operational gearing, strong balance sheet and quality of management.