No one would like to admit to being a fashion victim. But whether the preferred fashions are hemlines or gadgets, toys, or the very latest cuts and colours, the army of victims forms a crucial set of customers who many shopowners must court.
It may be inevitable that many companies that run the shops and form the investment opportunities in retail sector shares are also victims of fashion. Put this fact within the context of the specialised nature of many stocks in the FTSE retail sector (many are dedicated to narrow ranges, in clothes, electronics, household goods or entertainment) and sensible, ie cautious, equity investors may find themselves hesitating to the point of inaction.
It does not help that retailers attract so much attention. Because their brand names are easily recognised, and shop companies are ones with which consumers and investors have a direct and obvious relationship, their fortunes are followed closely here in the media and elsewhere. If you set the big supermarkets on one side, because they have rather different attributes, the attention garnered by the general retail sector is out of all proportion to its financial significance.
Ignoring the supermarkets, there are 63 retailers listed on the London Stock Exchange’s main list. Four are in the FTSE 100 — Marks & Spencer, Kingfisher, Next and Home Retail Group — but all 63 have a combined market capitalisation that is only about the same as Tesco’s £33 billion. Moreover, they speak for less than 2 per cent of the overall value of the market. Again ignoring the supermarkets, there are 20 retailers among the largest 350 FTSE-quoted companies. By contrast, there are fewer mining stocks in the FTSE 350 — only 18 — but together they mind £230 billion of investors’ capital. In pure financial terms, miners are, therefore, eight times as important as retailers.
Does that square with most personal investors’ perceptions about the relative significance of non-food retailers?
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There is further danger: for while the consumer economy is a vital part of the economy as a whole, the fortunes of general retailers may set odd or even misleading standards for the wider market. If investors see shops doing well, they may be tempted to assume that this portends well across the stock market.
As ever, retailers’ trading statements measure success, or failure, against what happened in the comparable period. If sales over last Christmas rose by 5 per cent, but fell by 5 per cent in 2008, the net impact is decidedly less impressive than might first appear. Retailers often use so-called “like-for-like” sales statistics, figures that try to minimise the impact of shop openings or closures. That is all well and good, but attendant vagaries must be considered and it is the durability and size of overall sales, irrespective of mitigating circumstances, that gets the cash tills ringing in a tune that investors can really afford to admire. Moreover, as Rob Templeman, the chief executive of Debenhams, said on Tuesday: “The acid test is what you deliver in profits.”
The one store that seems to have done unequivocally well in recent months is John Lewis. As a shop that offers one of the broadest ranges of goods, including food, thanks to its Waitrose arm, it is one that seems least vulnerable to the vagaries of fashion. Its enduring intent to deliver sound products at sound value would give it tremendous, and unusual, investment attractions. But, of course, it is not quoted and, while its co-operative ownership structure helps it to stand out from the crowd, it cannot be assumed that listed retailers will be able to follow its apparent commercial success.
Quoted retailers ranked among the best performers, in share price terms, in 2009. They climbed 72 per cent, almost three times as far as the FTSE all-share index, though the five-year record, as the chart shows, is much more mixed. Far from being a good sign, in these circumstances the recent record of wealth creation may also count against the sector now. Shares rose in anticipation of a recovery in sales and profits. Admittedly, the retail sector price-to-earnings ratio (p/e) and dividend yield benchmarks (12 and 3.6 per cent respectively) suggest that shares in the sector are valued no more expensively than the wider market. But given the risks outlined here, they should, perhaps, trade at discount.
DSG International looks especially pricey. According to numbers crunched by Hemscott, the stock market information service, the shares change hands at the equivalent of 17 times earnings per share, and give no dividend. Debenhams, meanwhile, sits on a p/e of 8.6 and offers a solid 3 per cent annual income.
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Out of all this, I offer two specific investment ideas. One is to look beyond specific retailers to companies that will benefit if retailing overall does well. It is one of the reasons why I selected Hammerson, the shopping centre-owning property company, as one of my ten new year share tips. I also like the look of Asos, the online fashion retailer. Shares, on a p/e of 20 and without a dividend, are hardly cheap. But Asos seems to be emerging as a strong predator, not a weak victim, of fashion.