Better logistics helps retail sector but it’s still a case of spotting markets and stocks

10th January 2013

The analysis on retail spending over the Christmas period often sets the tone of markets for January. This year the news has been encouraging, but also demonstrated the extent to which the retail sector is changing.

The British Retail Consortium said that internet spending made the difference for shopkeepers this year. Stronger logistics performance i.e. better delivery services and the like – by companies ensured that people kept spending online right up to Christmas. This begs the question – will online spending be the saviour of retail? And if so, might it be time to revisit retail stocks?

In previous years, shoppers have stopped spending online after the first week in December, but this year saw a smaller drop-off, spurring the rate of growth to new highs. The Times quotes Helen Dickinson, director-general of the BRC, saying: “That tells us how much improvement there has been in fulfilment, with click-and-collect, and on accuracy and delivery times. People felt that much more confident continuing to order a bit later than they did last year.”

As confidence grows in online retailing, companies are facing the dilemma of whether to close expensive high street stores and focus on online distribution. This may be gloomy for British high streets – the Guardian notes – but it may be just what UK retailers need to boost their margins.

As the Times article points out, it is not just distressed companies closing stores, but also groups such as Mothercare and Arcadia, firms which recognise that there are significant advantages to swapping a physical presence for a virtual one. 

Certainly, this could help the stronger retailers. However, the difficulty for investors is that the market has already spotted this. The FTSE General Retailers sector was up 33 per cent last year, substantially ahead of the wider market. Admittedly, this was from extreme lows and therefore partially represented a 'catch-up' rally, but it is unlikely to repeat the same feat this year. Equally, some of the key beneficiaries of any stronger retail performance – notably John Lewis – are privately-held and therefore not available for investment. 

Insiders are still expecting a tough year for retailers as trade magazine Retail Week notes. It quotes former Wickes, Iceland and Focus DIY chief executive Bill Grimsey saying: “2013 is shaping up to be yet another tough year on the High Street. It will see an increase in empty shops on the high streets around the country."

Nevertheless, some brokers believe that there is value in certain parts of the retail sector, particularly among established online retailers. As it notes on its website Panmure Gordon has highlighted ASOS and Dunelm as its 'conviction buys' in the UK retail sector ahead of the critical Christmas reporting season in the next few weeks.

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