Stores rebounded after the recent bout of profit taking and outperformed the market, but food retail stocks remained mired ahead of results from Tesco and Sainsbury’s.
Noble, which has just initiated coverage of the retail sector, expects investor interest to be sustained. Analyst Sanjay Vidyarthi said: “We think positive news flow into 2010 will sustain sector share price outperformance as a second wave of investors looks for cyclical exposure, despite the tough macro outlook.
“But we expect the market to be more discerning, looking for genuine value and growth potential. The focus shifts from financial to operational gearing.” The broker’s preferred picks include Halfords, WHSmith and Topps Tiles.
Topps Tiles issued a pre-close update on Wednesday confirming profits would be within the range of analysts’ expectations. Broker KBC Peel Hunt rates the floorings retailer a buy and said: “Having reviewed costs this year to deliver material savings, Topps is a much leaner and focused operator and this would facilitate profit growth, even in a flat or weaker sales environment.”
Kingfisher’s interim results propelled it up the retail leaderboard. Pali, advising buy, said: “The questions after the interims were whether there would be yet more profit upgrades and whether the market would re-rate Kingfisher further – the answers should be yes and yes.”
Investec rates the DIY group a hold and argued that “self-help upside has been priced into the shares, which await a new stimulus”. UBS retained its neutral stance and raised its profit forecast from £440m to £500m.
Next shares were also in demand after last week’s first-half results. ING moved from sell to hold on good margin news despite admitting a “struggle to see where the medium-term growth will come from”. Numis switched from hold to add and said Next “continues to navigate the recession with aplomb”. Advising buy, Singer argued Next is on a “miserly” rating and increased its target price from £18 to £19.75.
Next week the big scheduled announcement is Marks & Spencer’s second-quarter sales. Some analysts have been increasing their full-year forecasts in the expectation that clothing margins will be better than feared. Credit Suisse expects M&S to post a second-quarter like-for-like decline of about 5% in general merchandise and 2% in food.
Evidence of continued tough times for retailers was provided by Blacks, which warned it was likely to breach a banking covenant. It has agreed a standstill arrangement with its bank, Lloyds, until November 30. It is conditional upon delivering a restructuring plan acceptable to the bank, including “actions to achieve an exit of loss-making stores”. There has been speculation that boardwear business Sandcity may be put into administration.
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