City takes dim view of retailers’ mixed results

While some, such as idiosyncratic fashion specialist Ted Baker, posted strong numbers others, such as Argos-owner Home Retail, suffered in the harsh trading climate and the City took a dim view of the sector overall.

Evolution issued a bearish note, reiterating its “very underweight” stance on retailers, despite retail stocks’ strength lately. Evolution cautioned that the premiums at which many store stocks trade is excessive and warned: “These might be justified if they offered premium growth, but they don’t.”

Big grocers Tesco and Sainsbury’s both issued quarterly figures. Although Tesco’s UK trading was subdued Shore Capital, advising buy, described the update as “broadly encouraging”. The broker noted that the first trading statement under Philip Clarke’s leadership “contains considerably more disclosure, which we believe investors will welcome”.

Panmure Gordon, another buyer, said: “The shares are undervalued if Tesco can execute better in the UK, drive higher international returns and generate cash.”

Hold Sainsbury’s advised Jefferies after Wednesday’s update. The broker observed: “Given low fixed charge cover and 100% UK exposure, the stock is more vulnerable than peers to continued pressure on UK disposable incomes.”

Bernstein, which rates Sainsbury’s market-perform, said its growth was “modestly” behind peers and argued: “Sainsbury’s performance likely reflects some degree of consumers trading down between retailers in the face of tough macroeconomic environment and rising food inflation. In our view this dynamic favours near-term trading at Morrisons and Tesco.”

JD Sports, which flagged pressure on consumers in a trading statement last week, is fairly valued according to Singer. However, the broker said: “JD remains an extremely well managed business with both domestic and international growth potential. A strong balance sheet also gives flexibility and fire power.”

Sell Home Retail urged Espirito Santo, which fears the Argos-owner’s dividend is under threat. The broker fretted: “At present, demographic and product-specific headwinds outweigh any improvement in consumer confidence and while we think profits will trough in full-year 2012, cash generation is weakening and unlikely to cover the dividend.”

French Connection’s house broker Numis said that there is value to be had in the fashion retailer. French Connection’s shares have fallen 40% since March on the back of profit taking, but Numis said recent trading has been in line with expectations and wholesale is performing strongly.

All eyes will be on the electricals groups next week, when Dixons and Kesa issue full-year figures.