3 Retail Shares To Watch This Christmas

Published on
  • Currys PLC (LON:CURY) profits could dwindle if household incomes fall
  • ASOS plc (LON:ASC) returns in need of strong Christmas performance
  • J Sainsbury plc (LON:SBRY) competitive pricing affects profits

The run-up to Christmas is typically the golden period for retailers, where they enjoy a flurry of activity which helps to sustain them throughout the quieter periods of the year. 2021 spending soared well above pre-pandemic levels, though cost-of-living concerns might result in a different experience for retailers this year.

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Currys

Matt Britzman, Equity Analyst, Hargreaves Lansdown:

“As the UK’s leading retailer of tech products and services, Currys is an excellent barometer for the tech side of the retail sector. Currys sells a lot of big-ticket items like TVs, laptops, and mobile phones – just the sort of items that are found under the tree on Christmas day. But because these items are expensive, demand could be on the chopping block if household incomes fall.

To make matters worse, tech tends to have short product cycles. Think of the iPhone for example – a new model comes out every year. If cash-strapped consumers decide not to upgrade their model this Christmas, Currys will be left with a surplus of new iPhones. It’s a cycle that leads to higher inventories and ultimately discounting, which would put pressure on already thin margins.

Back in July, operating margin guidance was downgraded for 2023/24, from 4% to 3%. Because of recent developments, that target had to be pushed back a year.

There are some positives though. One of the group's main attractions is its omnichannel model. You can enter a store and have access to the entire online shopping range, or speak to an in-store expert in the comfort of your own house. These services help attract and retain customers once they've made contact, and that's helping the group to retain its market share. Currys’ business is highly seasonal, with a substantial proportion of its revenues, and any profits or losses, generated in the second half of its financial year.

A quiet Christmas could spell trouble for the big-ticket retailer. If consumers aren’t willing to spend big at Christmas, they might just keep their wallets closed for a while. The group’s valuation is some way below the long-term average, reflecting the short-term difficulties. While this could mark a good entry point for investors willing to accept the immediate risks, keep in mind that things could still get worse before they get better.”

ASOS

Matt Britzman, Equity Analyst, Hargreaves Lansdown:

ASOS is an online fashion retailer, selling a wide range of clothing, cosmetic products, and accessories. Just two years ago, the pandemic and its associated lockdowns played right into the hands of the group’s online-only business model.

Fast-forward to today and the story looks very different. Full-year underlying profit before tax fell to £22m, down from £194m the previous year. And as a result, the company’s valuation has fallen around 78% over 2022.

In part, the decline in profits is due to cash-strapped customers returning more items this year, which caused higher operating costs and elevated stock levels. In a bid to reduce these stock levels, ASOS began discounting goods which was a big driver of the decrease in gross margin.

The group also expects to write-off roughly £115m in stock during the first half of this financial year, which will be a further dent to the bottom line. These problems aren’t going to be solved by a strong Christmas performance, but it would certainly soften the blow.

The group sells products all along the price scale, meaning it’s set up well to offer something for everyone. At a time where consumers are becoming increasingly cost conscious, this should be an advantage relative to other fashion retailers, who typically only target one price-point.

There’s also the group’s Premier programme, which offers free delivery for a year. This service grew its customer base by an impressive 12% last year. Given that the average Premier customer ordered 3.5 times as often as a regular customer, this programme will be a key driver of both customer loyalty and profitability moving forward.

The group’s balance sheet is looking in better shape thanks to freshly negotiated terms on credit facilities. That at least offers some breathing room while ASOS tries to get cashflow back into positive territory, something management expect to deliver next year. Though we remain cautious.

One thing’s for sure, if ASOS is going to turn its fortunes around then a strong Christmas period would be the perfect present.”

Sainsburys

Sophie Lund-Yates, Equity Analyst, Hargreaves Lansdown

“It goes without saying that Christmas is a crucial time of year for supermarkets. It’s a time of consumer excess, including on more lucrative items like alcohol. We’re cautiously optimistic that the grocery sector could report some bright results this festive season.

Despite an unexpected fall in overall UK retail sales in November, food sales rose strongly as customers stocked up for Christmas. That suggests consumer behaviour could be working in the grocers’ favour.

That said, we’ll have a particular eye on Sainsburys, who now owns Argos which gives it increased exposure to general merchandise. General merchandise is a riskier area of the market when real wages are falling (after inflation). Buying a new gadget isn’t as important as putting dinner on the table.

General Merchandise and Clothing saw sales fall 6.1% and 6.0% respectively in the first half of Sainsbury’s financial year. While we’re cautious of Argos’ performance, recent figures show that department store and homeware sales are holding up slightly better than expected. This could mean that Argos puts in a more resilient showing than we’re expecting.

That’s not the only potential source of Christmas cheer for the group. In response to customers tightening their purse strings, Sainsburys is taking aggressive action. A fresh round of investment in keeping prices low means the group's been able to raise prices after its competitors, offering its strongest value proposition in years.

The focus on price is working. Compared to key competitors like Tesco, Asda and Morrisons, Sainsburys is the only one to grow volume share since pre-pandemic times. While this is the right move from a competitive angle, it’s affecting profits. Together with the group’s own soaring cost inflation, it meant underlying operating profit fell 8% to £496m in the first half.

No matter what happens this Christmas, Sainsburys has a stronger balance sheet than previous times and free cashflow is expected to run into the hundreds of millions. That gives crucial breathing room to stomach ups and downs and helps underpin the prospective dividend yield of 5.5%.”