Many bricks-and-mor­tar re­tail­ers are meet­ing the e-com­merce chal­lenge head on…


If you look at the share prices of con­ven­tional re­tail­ers to­day, you’d be for­given for think­ing that the high street is on its last legs. Re­cent store clo­sures and bank­rupt­cies have added to pes­simism. Mean­while, the eye-wa­ter­ing val­u­a­tions of on­line re­tail­ers re­flect a very rosy fu­ture in­deed. The stock­mar­ket has de­liv­ered its ver­dict: Ama­zon will take over the world, leav­ing a re­tail apoca­lypse in its wake.

As Ama­zon creeps to­wards a $1tn val­u­a­tion, its shares trade on over 100 times this year’s earn­ings. That leaves lit­tle room for any dis­ap­point­ment. In con­trast, out of favour Marks & Spencer and Macy’s, both of which are un­der­go­ing ma­jor trans­for­ma­tions, are on a mere 12 times and 10 times, re­spec­tively*.

So does this gulf in val­u­a­tions re­ally point to the ex­tinc­tion of the high street? We be­lieve it’s mis­guided to as­sume that on­line will be the only way to shop. On­line trans­ac­tions are here to stay, but in­vestors shouldn’t un­der­es­ti­mate the stay­ing power of shops. A shop­ping trip is a ma­jor leisure ac­tiv­ity for a great num­ber of peo­ple – not just a ne­ces­sity, but a so­cial ac­tiv­ity, even a hobby. The con­ve­nience of clicks can’t com­pete with that.

In­stead, the mar­ket’s dis­dain for con­ven­tional re­tail­ers could be a buy­ing sig­nal for con­trar­ian in­vestors. The high street’s sur­vival of the fittest has cre­ated some high-pro­file vic­tims. When the sta­tus quo is chal­lenged, com­pa­nies with cred­i­ble plans to rein­vent them­selves tend to be the ones to sur­vive and thrive.

Many bricks-and-mor­tar re­tail­ers are meet­ing the e-com­merce chal­lenge head on, by cre­at­ing multi-chan­nel of­fer­ings with mo­bile apps and ‘click and col­lect’. Some are also adding other leisure ser­vices to their sites, in­creas­ing foot­fall and en­cour­ag­ing spend­ing. And many have pow­er­ful brands that e-com­merce has yet to ri­val. Marks & Spencer pro­vides a good ex­am­ple.

Re­vivals in Marks and Spencer’s for­tunes have been her­alded be­fore, but we be­lieve that this time re­ally is dif­fer­ent. Led by vet­eran re­tailer Steve Rowe and turn­around spe­cial­ist Archie Nor­man, the com­pany is shed­ding ex­cess stores, re­vi­tal­is­ing prod­uct lines and im­prov­ing its pric­ing strat­egy. Its food divi­sion is still very pop­u­lar and its in­vest­ments in IT and in­fra­struc­ture are cre­at­ing a ro­bust multi-chan­nel of­fer­ing. If suc­cess­ful, this should boost earn­ings and im­prove mar­gins.

One of our best-per­form­ing stocks is Macy’s, which op­er­ates the US’s largest chain of depart­ment stores. Given the chal­lenges of e-com­merce, the com­pany’s shares have been deeply out of favour. How­ever, the com­pany re­cently an­nounced bet­ter-than-ex­pected sales and a more promis­ing out­look. Strong con­sumer spend­ing, im­prove­ments in its bricks-and-mor­tar busi­ness and more ‘dis­ci­plined’ dis­count­ing are help­ing the com­pany to pos­i­tively sur­prise in­vestors. Macy’s has also been cut­ting costs and store space, while driv­ing more value from its prop­erty hold­ings. Around 14% of Macy’s shares are cur­rently on loan to short sell­ers, who are bet­ting that they will fall in value. Such ‘short in­ter­est’ is a sure sign that a stock is res­o­lutely out of favour. For con­trar­ian in­vestors like us, it can point to ex­actly the sort of over­looked op­por­tu­ni­ties that we pre­fer.

We see th­ese and many other re­tail­ers as ‘ugly duck­lings’ – unloved shares that most in­vestors shun. Although they have been un­der pres­sure from on­line com­peti­tors, they have con­sid­er­able po­ten­tial to defy the mar­ket’s pes­simistic ex­pec­ta­tions and turn their cir­cum­stances around. And while we wait for our ugly duck­lings to be­come swans, most – like Macy’s and M&S – of­fer high­erthan-av­er­age div­i­dend yields. We be­lieve that the de­pressed shares of high­street op­er­a­tors con­ceal com­pelling op­por­tu­ni­ties. Smart in­vestors should look out for high street bar­gains. * As at 22 Au­gust 2018, data source: Bloomberg

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