Bullish outlook for retail despite jitters

Despite ongoing jitters about trading prospects, particularly in the new year, broker Altium initiated coverage with a bullish sector note. Analyst Philip Dorgan, who has just joined Altium, said food and general retailers alike are undervalued.

Generalists’ share prices discount potential bad news, but do not reflect “the potential for margin recovery in the medium term and self-help opportunities to provide support in the short term”.

In food, he said, “we see a more stable environment and relatively predictable growth from the core UK market, both of which should help valuations”.

His “key buys” among small and mid-cap groups include Dixons Retail, Ted Baker and Topps Tiles. On his sell list are HMV, JJB Sports and Ocado. His big cap buys are Marks & Spencer and Tesco.

Next’s third-quarter sales growth of 2.2% came in at the top end of guidance, but the retailer warned that rising cotton price would mean an increase in selling prices at the high end of expectations of between 5% and 8% in the first quarter of next year.

Broker Singer described the update as “not quite as good as hoped” and noted: “With tougher comps to come, sales will probably fade down the guided second half range over the course of the final quarter”. Arden has a price target of £24.50 and observed: “Despite the fashionable concern about clothing price inflation next year we run with our add view, given the very modest rating.”

M&S was popular among some brokers ahead of next week’s interims. Seymour Pierce raised its price target from 420p to 450p and expects first-half profits of £348m. The broker expects full-year consensus to move up after the results and said there is “real momentum” in general merchandise while market share in food is on the up.

Panmure Gordon rates M&S a hold and said: “The chief executive of six months, Marc Bolland, is due to outline his strategy but, in the absence of clarity on his plans, we prefer to recommend buying Next shares since we think that they offer more visibility.”

House broker Investec welcomed the appointment of Jonathan Hart as Thorntons chief executive.

Hart joins from Caffè Nero, where he was managing director. The broker said Hart “has the strong retail background and skills set sought by Thorntons. We would expect the shares to react positively to this appointment”.

Among the big updates next week are Sainsbury’s interims, and the British Retail Consortium’s monthly sales data will give a reading of the retail sector’s health.