Photographer: Luke MacGregor/Bloomberg
markets

Cheap U.K. Retail Stocks May Be Too Good to Be True

  • Some retail shares may not recover, says Old Mutual’s Murphy
  • Stock pickers cautious about Debenhams, Dixons Carphone, M&S

Investors seeking to snap up bargains among slumping U.K. retail stocks had better beware that some discounts may be too good to be true.

Simon Murphy, a fund manager at Old Mutual Global Investors, says structural problems at several British retailers mean that although share prices have tumbled, they’re unlikely to recover. Traditional brick-and-mortar retailers have too much store space and continue to lose business to online competitors, he said.

“I’m nervous that even if the consumer environment improves, some of those legacy retailers will end up proving to be classic value traps,” said Murphy, who manages Old Mutual’s U.K. Equity Fund and U.K. Opportunities Fund. “They look cheap but they just stay cheap because the earnings never grow and in fact they just decline, and the business just stays under pressure.”

The London-based investor is cautious on Debenhams Plc, Dixons Carphone Plc and Marks & Spencer Group Plc. His funds own Tesco Plc, Booker Group Plc and Pets at Home Group Plc.

The FTSE 350 General Retailers Index has fallen 8.8 percent since the U.K. voted to leave the European Union in June 2016. Dixons Carphone has dropped 52 percent during that period while Marks & Spencer has slipped 17 percent. Credit Suisse analyst Pradeep Pratti said M&S increasingly looks like “a value trap,” and the shares have further to fall, according to a Jan. 24 note that downgraded the stock to underperform.

Bearish investors also are making bets against Debenhams, which said Jan. 4 that year-end sales declined and full-year profit will be below analyst expectations. It’s the most-shorted stock in the FTSE All-Share Index, according to IHS Markit Ltd. data. About 24 percent of the shares were sold short as of Jan. 23, the data show.

Brexit uncertainty probably will prompt Britons to save rather than spend, and purchasing power is under pressure from stagnant wage growth, according to Murphy. That view is echoed by Mark Phelps, chief investment officer of global concentrated equities at AllianceBernstein in London. U.K. shoppers probably won’t be making too many big purchases due to job uncertainty in a post-Brexit world, he said.

‘Pretty Cautious’

“We’ve been pretty cautious on the U.K. consumer for a long time,” said Phelps, who sees food retail stocks continuing to outperform non-food high street retailers this year. “There’s nothing I can see new coming along at this moment that makes me say -- ‘a-ha!’ That’s the change to everything. I just don’t see that.”

The only U.K. retailer that Phelps owns in the AB Concentrated International Growth fund is  B&M European Value Retail SA, the budget homewares seller. He previously held Asos Plc and hasn’t owned a U.K. grocery stock since Tesco before the global financial crisis.

To be sure, not everyone sees consumer spending slowing this year, particularly if salaries rise.

“If you get some recovery in real wages then I think you’ll get some pent-up demand for discretionary purchases,” said Daniel Morris, senior investment strategist at BNP Paribas Asset Management in London. While the pressures facing these retailers “makes sense now, by the end of the year it could’ve turned around.”

— With assistance by Beth Mellor, and James Cone

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE