Retailers run on as updates hold promise

Bullish notes on some big names and anticipation of encouraging updates provided the sector with momentum in an overall rising market.

Numis believes “retailers’ earnings risk to be significantly to the upside” but cautioned that “much of this good news is now in the price”. The broker said: “Our tentative base case is that the sector renews a broadly flat or anaemic growth profile, with 2010 forming the trough year for earnings.”

Pali International observed: “There has been a general change of tone among retailers recently, with 2009 now seen as a year of some recovery, but 2010 now seen as a tougher year – not least as VAT goes back up in January.”

Marks & Spencer was in fashion after Goldman Sachs published a buy note, arguing the retailer has potential to add £1bn of EBIT in five years. The broker is excited about potential changes arising from M&S’s 2020 – Doing the Right Thing strategic programme and hopes for news on developments in October.

There was spark in electricals giant DSGi’s share price as UBS reiterated its buy advice. The broker likes the results so far from store reformatting and lifted its profit forecasts. US giant Best Buy will set up in competition with DSGi in the UK next year, but UBS argued that the negative impact of Best Buy’s arrival on profits would likely be outweighed by the benefits of DSGi’s self-help programme, including refits, a focus on gross margins and cost savings.

Take profits in Home Retail, recommended Nomura. The broker increased its earnings forecasts and upped its target price, but brought its recommendation back from buy to neutral. Nomura believes potential profit upgrades are already reflected in the share price and said: “We see DSGi and M&S as more compelling investments at this part of the cycle.”

HMV rose over the week, despite uncertainty about whether chief executive Simon Fox would leave to head broadcaster ITV. However, the entertainment retailer was out of favour with Morgan Stanley, which questioned its future prospects. The broker was concerned about the threat from digital formats and that 2009/10 would bring HMV’s earnings peak.

JD Sports Fashion has bought the “key trading assets and trade” of rugby brand Canterbury from the label’s administrators. JD chairman Peter Cowgill said the deal would “diversify the group’s interests in the sports and related leisurewear markets.”

The big diary event next week will come on Tuesday, when the BRC’s retail sales figures for July are issued.