The rout in retail stocks

High street bellwether Next is just the latest big name to hit trouble. It has made mistakes, but is also grappling with sector-wide problems. Alice Gråhns reports.

889_MW_P08_shares_main

It's been an awful week for the high street. Fashion retailer New Look announced that it is closing 60 stores and cutting rent payments to landlords. Flooring specialist Carpetright is likely to close 100 stores and also wants rent cuts. Children's clothing and toys retailer Mothercare is in talks with its banks to restructure its finances. Shares in Moss Bros plunged 33% after the men's retailer warned on 2019 profits. Finally, the boss of clothing and homeware chain Next, Simon Wolfson, described 2017 as "the most challenging year we have faced for 25 years".

That was "quite a statement from Wolfson", says The Observer. The FTSE's second-longest-serving chief executive (after WPP's Martin Sorrell) is widely deemed "restrained and serious-minded". But it is no surprise. British retailers have endured their worst start to the year since 2013, with annual sales growth slowing to 1.6% in January compared with 2.3% in January 2017, according to the Office for National Statistics.

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Each brand " has its own problems: mountainous debts, unpaid tax bills, or merely buying the wrong stock". Wolfson has admitted to the latter, highlighting "self-inflicted product-ranging errors and omissions". The ranges apparently didn't contain enough basics such as women's blouses, notes Naomi Rovnick in the Financial Times, while the buyers overemphasised "fast fashion": cheap versions of catwalk styles that quickly appear in shops.

A sea of troubles

But those weren't the only reasons Next's sales fell 8% to £2.1bn last year, while pre-tax profits dropped 8.1% to £726m. There are also some broader issues for all retailers, notes Ben Marlow in The Daily Telegraph. "Household budgets are being squeezed, business rates are too high, the rise of the internet continues," and import costs have increased. There has also been a shift away from shopping towards leisure spending, notes The Observer: spending on women's clothing was down 3% last year; spending on pubs, restaurants and entertainment was up more than 10%.

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So what next for Next? Wolfson "can do nothing about key macroeconomic factors", says Lex in the FT. And even if previous mistakes on its clothing ranges have been rectified, it looks "a long slog back" to Next's valuation of several years ago. At 11 times forward earnings, it trades a third below its peak. But having outrun the FTSE retailing index by 26 percentage points over the past year, its shares already price in a lot of recovery. "Candidly, it is too early to buy."

Britain's ten most-hated shares

Most shorted sharesSectorShort interest on 27 Mar27 Feb
1GVC HoldingsGaming operators16.91610.189
2Melrose IndustriesIndustrials15.33914.841
3CarillionConstruction14.814.8
4Greencore GroupConvenience food13.58NEW ENTRY
5Pets at HomePet retailers11.6711.47
6The Restaurant GroupRestaurants11.61NEW ENTRY
7DebenhamsGeneral retailers11.4713.82
8Marks & SpencerGeneral retailers11.2410.18
9AAMotor insurance11.212.03
10J SainsburySupermarkets10.88NEW ENTRY
OUTProvident FinancialFinancial services13.38
AggrekoPower supplies10.88
Wm MorrisonSupermarkets10.199

These are the ten most unpopular firms in the UK, based on the percentage of stock being shorted (the "short interest"). Short sellers aim to profit from falling prices, so it can be useful to see what they're betting against. The list can also highlight stocks that might bounce on unexpectedly good news when short sellers are forced out of their positions (a "short squeeze"). There were several new entries this week. Greencore Group has warned on profits and plans to restructure, while The Restaurant Group has suffered another year of falling sales amid the casual dining slump.J Sainsbury is heading for a fourth year of declining profits.

City talk

"Reckitt Benckiser's lavishly paid Rakesh Kapoor has reached for the beta blockers and calmed his deal-fuelled adrenaline rush," says Jim Armitage in the Evening Standard. Faced with troubles at his hygiene and homecare arm, and "still integrating his ill-advised Mead Johnson Nutrition takeover", he has walked away from Pfizer's over-the-counter medicines. Buying part of Pfizer's consumer business actually makes more strategic sense than the Mead deal: Advil painkillers would complement Reckitt's Nurofen, for example. But given all the problems already on his plate, he is right to walk away from yet another task.

"What's the biggest difficulty in selling sneakers to Americans?" asks Matthew Vincent in the Financial Times. "Ironically, say analysts, it's lower footfall in malls". But in that case, why is Bury-based JD Sports entering the US market by acquiring footwear retailer Finish Line for $558m? And where do Americans don their trainers if not in malls? Finish Line costs a mere six times earnings and deepens JD's relationships with manufacturer Nike. Meanwhile, the answer to the second question "seems unlikely to be: sports facilities".

"Most people like a mysterious cardboard box on Valentine's Day," says Alistair Osborne in The Times. Not Anthony Smurfit, boss of packaging business Smurfit Kappa. When International Paper requested a meeting that day, he replied that it "would not be in the interests of Smurfit Kappa's people and shareholders to pursue discussions". Nine days later he changed his mind and opened the box. It contained a cash-and-shares bid that valued the shares at €36.46. Smurfit rejected it on 6 March. Since then, International Paper asked for another meeting, raised its offer and had that privately rejected too. But everything has a price: "dangle €40 and Smurfit would have no excuse to be so obstructionist".

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