These are tough times for retailers but two big name chains reporting next week could bring a ray of sunshine to the UK high street.
WM Morrison
In share price terms at least, WM Morrison (LSE: MRW) has been this year’s big winner in the supermarket sector. Its share price has risen almost 18% over the last 12 months, compared to just 2.6% for Sainsbury’s, and a dismal 9.5% drop at Tesco. Let’s not get too excited, such is its fall from grace it’s still 33% lower than five years ago.
Morrisons’ last trading update in May also showed signs of improvement, with a second consecutive period of like-for-like sales growth, up 0.7% excluding fuel. It took a knock from the disposal of its ill-fated M:local chain but analysts admired chief executive David Potts’ strategic switch toward cutting prices, improving the appeal of the stores and winning back consumers.
Morrisons’ is looking to boost its market share by taking advantage of accelerating food deflation to unleash yet another price war, with cuts of up to 12% on meat and poultry. It’s taking the fight to budget rivals Aldi and Lidl, albeit at the expense of margins. My worry is that price falls are a zero-sum game, and all the big established supermarkets will end up the losers.
Morrisons’ has a strong balance sheet and falling debts as it focuses on generating cash, and customers do seem to be coming back to its stores. Earnings per share are forecast to rise a healthy 30% next year but today’s valuation of just over 25 times earnings suggests it needs to post a really positive surprise on Thursday to stay on the comeback trail.
Who’s Next?
The clothing retail sector has also endured a tough time lately, just ask investors in Next (LSE: NXT), which has seen its share price fall 25% in the last 12 months. The good news is that this leaves it trading on a tempting valuation of just 12.7 times earnings, ahead of what could be a positive set of results next week.
Next started the year badly, with clothing sales down on an unseasonably mild winter, and it also suffered from shortage of stock within its Directory online unit. Brexit was a further blow and although consumer and shopper confidence appears to have picked up, the weaker pound will drive up the company’s costs by making imported textiles more expensive.
Directory has been a success but is now facing growing competition from online rivals such as Boohoo and ASOS, while the likes of Debenhams play catch-up. Operating margins of 20.7% impress but EPS growth looks anaemic for the next few years.
Wednesday’s half-year results should reflect rising clothing sales due to warmer summer weather, helping the share price recover lost ground. A healthy balance sheet and liquidity also strengthen the investment case, while its forecast yield of 3.5% is solid and well covered. Next could be on course for a stylish comeback.