Should you ditch shops from your Isa investments?
As stores close and big names like House of Fraser flounder . . .
AS MORE and more of us shop online, some of the big High Street retailers are beginning to struggle.
In the past few months, electronics group Dixons Carphone has revealed its profits have nosedived by 24 pc, Carpetright has announced an annual loss of £70.5 million and department store chain House of Fraser has gone into administration and then been bought by Sports Direct owner Mike Ashley.
Meanwhile, Poundworld has hit the buffers, Toys R Us and Maplin have collapsed and even profits at middleclass favourite John Lewis are down 77 pc on last year.
Overall, 50,000 retail jobs have been axed since the start of this year, with 60,000 stores closing since 2013.
Surely, this is the time for investors to jump ship?
Not so fast, say some experts. They claim investors can still find opportunities to make money among traditional retailers — you just need to sort the wheat from the chaff.
Alistair Wittet, fund manager at Comgest, says: ‘ Around 80 pc of purchases still take place in stores. People still enjoy going out for a day’s shopping and offline can be more practical, as it doesn’t require you to be home for the delivery or go to the Post Office.’
In retail, business can take a sharp turn for the worse very quickly. For example, a bout of unseasonal weather can see sales fall off a cliff as shoppers decide not to splurge on a summer wardrobe when it’s rainy and not spend on cosy jumpers during a mild winter.
And with punitive business rates, rents and staff wages to pay, a small slip in sales can quickly result in a big fall in profits.
Chi Chan, a portfolio manager for the Hermes European Alpha Equity fund, which would have turned £10,000 into £13,717 over the past three years, says it’s important to differentiate between a company that’s struggling with temporary issues such as the weather or a warehouse fire and those failing to grasp permanent changes such as the move to online shopping. One of his favourite investments is the sportswear brand Adidas, which is benefiting from the trend towards ‘athleisure’ clothing. He says: ‘There is a growing interest in health and wellbeing and, at the same time, workplaces are less formal. ‘In many offices, it’s now rare to see ties — people want to wear comfortable clothing.’ Shares in Adidas have almost quadrupled from £50 in December 2014 to around £186 today, helped by booming profits in the U.S., which is the biggest sportswear market in the world. Mr Chan also likes retailers that are integrating their online business with their High Street presence. Examples include Inditex, which owns Zara and Massimo Dutti. The company has struggled recently as the euro has been strong. It manufactures clothes in euros, but sells them in other currencies, so profits are lower when the euro is up.
But what Mr Chan particularly likes about the business is its quick turnaround on clothing.
Where some companies do a bulk order of clothes months before they hit the shelves, items at Zara go from design to shelf in just three weeks. Online sales at the business are growing 40 pc yearonyear and a move towards ‘click and collect’ means it can sell more to customers when they come in to collect their orders. Shares have risen from around £17 to £24.70 over the past five years.
It’s a strategy Scott McKenzie, manager of the Saracen UK Income fund, likes, too. ‘People think online companies such as Boohoo and Asos will win out over retailers with bricks and mortar stores, but I don’t think it’s that simple,’ he says.
‘John Lewis and Next have fantastic online businesses, but still have shops. I think these hybrid models will do well.’
His fund, which would have turned £10,000 into £12,370 over the past three years, invests in fashion retailer Next, where online sales soared 18 pc in the 14 weeks to May. Next’s share price has rocketed more than 50 pc to £55.48 since July last year.
Mr McKenzie thinks Next was one of the first to spot the problems the industry was facing and start to change.
‘A number of other companies have only just realised how bad things are. The problems come when you’re too late to adapt, which is what has happened to M&S and Debenhams.
‘The really vulnerable businesses are those where you can get the same thing online, which is what has affected Dixons Carphone.’
He also invests in sofa company DFS, which has been buying up smaller retailers such as Sofology, to increase its market share.
The firm has suffered as household spending has slowed, but should benefit if the trend to ‘improve not move’ continues in the housing market and people look to redecorate their homes.
And, as he points out, people typically want to sit on a sofa before they buy it, which they can’t do if they shop online.
He adds: ‘It’s hard to see a bright story in the retail sector. None of these companies are doing particularly well, but they’re not collapsing — and we would prefer to invest now while their shares are cheap and hope they’re doing much better in a few years’ time.’