Sector fears cause general retailers to be downgraded

The changes mean Singer is now up to 10% below consensus on many retailers.

Singer analysts expect retailers’ growth to slow from now on and warned: “Although the sector has already underperformed so far in the second half we believe that the array of risks, coupled with the current valuation relative to the market, still leaves the sector exposed to further downside.”

The broker downgraded Home Retail Group, Marks & Spencer and Topps Tiles from fair value to sell, where they join Asos and Carpetright, on the back of worries about consumption patterns and the housing market.

Dunelm, JD Sports, Mothercare and SuperGroup have all been downgraded from buy to fair value on the grounds that “they are largely up with events”.

Singer analyst Matthew McEachran said his sector concerns were weak earnings trends, resulting from factors such as public sector job cuts, input price inflation likely to put pressure on margins and wage inflation not keeping up with that of goods and services.

He is also worried by rising mortgage interest costs, weak consumer sentiment and food price inflation that will draw spend away from discretionary categories.

McEachran said: “Where there have been downgrades this year in some stocks, this has been counterbalanced by upgrades in others, leaving the net changes largely neutral on an aggregated basis.

“The bulk of upgrades relate to clothing stocks, where a combination of sales and especially margin delivery has helped profitability. Stripping this sub-sector out points towards an underlying downgrade cycle already being under way.

“Take this a step further and suggest, as we are, that the gross margin benefits could now reverse and trigger downgrades in the clothing sub-sector as well, and we believe that the overall sector is now tipping into a downgrade cycle”

The broker believes general retail like-for-likes may fall by about 2.5% in 2011, compared with an expected decline of 1% this year. While some retailers will outperform by extending market share or moving into new product markets, the broker cautioned that “the scope for growth from capacity withdrawal has reduced and we believe sales expectations in the sector are now too optimistic”.

It stuck to its buy stance on HMV, Debenhams, Halfords and Kesa.