Is there still life on the UK high street?

Conditions on the UK high street are undeniably tough. But Marks & Spencer is just one of a number of retail stalwarts who are turning things around by targeting customers who are less vulnerable to the debt squeeze.

Tesco's record profits have grabbed the headlines this week and with good reason. The supermarket has revolutionised British retailing in recent years, taking on the high street and winning.

But the establishment is fighting back. Take Marks & Spencer, down on its luck and destined for oblivion only a couple of years ago. Now the retailer is enjoying its best figures in three years, with some suggesting profits could soon reach the £1bn mark.

How have things been turned around? It's all down to reinvention. The store is more like Topshop for grown-ups than the M&S of old, says Clare Coulson in The Daily Telegraph. The man behind the turnaround is CEO Stuart Rose, who has managed to create huge demand for "key pieces" while keeping track of its bestsellers, so that it can provide fast-changing stock a strategy at which younger stores are already adept. They have been bringing the stores into the 21st century too. Last year, 20 branches were refurbished and 60 others will be overhauled this year.

But M&S isn't the only comeback story. Just when you thought the UK high street was in tatters, some of the great British names are proving the doubters wrong, says Harry Wallop in The Daily Telegraph.

Austin Reed and Laura Ashley, both of which have been struggling for a number of years, recently released "surprisingly strong" trading statements and Burberry has turned the corner in its home market after at least three years of falling sales in the UK.

These retailers all target older, more affluent customers with lower levels of debt who are better off than those younger customers beginning to "feel the pinch". Another trait these companies share, according to Sandra Halliday at trend-watchers WGSN, is that they've been working on their stores and supply chain, and have been steadily rebuilding their balance sheets.

One more retailer that has been paying down its debt is department chain store Debenhams, which has announced that it is to return to the London Stock Exchange next month in a £2bn listing, the UK's largest in almost five years. The management team at Debenhams has worked its magic, says Lex in the Financial Times. In the two years since it was taken private, the UK retailer has improved its supply chain management, increased its market share and grown its margins, all the while generating "enough cash to pay down debt" and in the process transforming itself into a "growth story". It plans to build on the success of its Designers at Debenhams' offering, capitalising on the "lust" for designer labels at low prices, while rolling out its new Desire by Debenhams' store format.

Another high-street name stands out: Tim Waterstone, who founded the Waterstone's books chain after being sacked by WH Smith 25 years ago, has launched a £280m bid to buy back the business from its owner, HMV, says Fiona Walsh in The Guardian. The deal is conditional on HMV abandoning its plans to take over rival book chain Ottakar's, which could leave the way clear for WH Smith to launch its own offer for Ottakar's.

Waterstone sold his business to WH Smith in 1989, but bought it back in 1998 when he was head of HMV Media Group. He resigned as chairman of HMV a year before it floated in 2002, but has been "unhappy" with the performance of the business, believing its pursuit of a "middle-market, discount-led" strategy to be the wrong one. This potential upheaval in the bookseller market is further evidence that the key to prospering on the high street is to move with the times.

The best stocks in the sector

For anyone who is considering buying when Debenhams (DEB, 469p) lists on 4 May, Lex in the FT sounds a note of caution. The offering "does not look cheap". At the top end of the indicated price range, the business is valued at 14.9 times 2006 earnings, not much of a discount to Marks & Spencer (MKS, 596p) at 15.6 times (after stripping out property, since Debenhams no longer has any). Its post-offering debt of 3.4 times earnings before interest, tax, depreciation and amortisation also requires a "leap of faith", since free cash flow will be used for growth and to pay dividends.

In a recent Morgan Stanley report, analyst Claire Kent says that there is "more to go" for Marks & Spencer's shares. After the retailer's better-than-expected fourth quarter results, they have upgraded their full-year estimates and price target and have a "fair value" for the stock of £6.80. Kent cites  strong general merchandise sales in thefourth-quarter numbers at +8.2% (versus their forecast of +0.5%), with food +5.6% (+5.3%). It maintains its overweight' rating.

Halfords Group (HFD, 317p) is one of Goldman Sachs's top retail picks they rate it outperform'. The wide valuation gap to the sector is "unjustified", they say, given lack of competition from supermarkets and exposure to defensive and fast-growing products. On their estimates, the stock trades on a reasonable price/earnings ratio of 11 times and yields a healthy 4.3%.

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
19 Feb 2021
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
16 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021
Three of corporate Japan’s hidden gems to buy now
Share tips

Three of corporate Japan’s hidden gems to buy now

Professional investor Nicholas Price of the Fidelity Japan Trust picks three of his favourite Japanese stocks that he thinks the market has overlooke…
12 Apr 2021

Most Popular

Lab-grown meat: how “moo’s law” will drive innovation
Soft commodities

Lab-grown meat: how “moo’s law” will drive innovation

Jim Mellon and Anthony Chow, co-founders of Aim-listed Agronomics, explain why they believe that “cellular agriculture” will benefit from massive long…
16 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
Lab-grown meat: the new agricultural revolution
Soft commodities

Lab-grown meat: the new agricultural revolution

Vegan alternatives are taking off, but the future of food technology lies in lab-grown meat – cultivating steaks and burgers from animal cells, says A…
16 Apr 2021