Analysis: European retailers risk dressing-down from investors as consumers flinch
11/09/2023 06:00
By Joice Alves
LONDON, Sept 11 (Reuters) - European retailers have been
unlikely stock market stars this year, but a long spell of high
borrowing costs and inflation has started to bite, so wary
investors will be looking for reassurances from the likes of H&M
HMb.ST and Zara-owner Inditex ITX.MC when they issue
business updates this week.
Last year, investors and strategists expected retailers'
margins to take a hit, as inflation eroded households'
discretionary spending and some of the region's heavyweights
warned of tough months ahead.
This gloomy forecast did not play out, with retailers
largely able to pass costs on to consumers as demand proved more
resilient than initially feared. The STOXX retailers index
.SXRP is up a whopping 25% to date - making it the best
performing sector so far in 2023 after it was second-worst last
year next to real estate .SX86P .
The broader STOXX 600 .STOXX is up by 7% this year,
meaning retailers are outperforming by the most on record.
The snag is that this stellar run has been partly built on
investors unwinding bearish bets, or short positions, on retail
stocks, after last year's pessimism proved overdone. This means
retail stocks might not see as many willing buyers as earlier
this year.
"In 2022 short sellers had built positions in the sector and
those have been unwound," said Benjamin Jones, Director of Macro
Research, Fundamental Multi Asset team at Invesco.
"We’d be more worried about fundamental weakness starting to
show up more clearly in the coming months".
Jones expects retail stocks to fall in the second half of
the year. The index dropped in August and is down in September,
but it is still just 5% below July's 17-month highs.
And now, with inflation slowing down, the accumulated
effects of costlier credit and months of surging prices are
weakening demand.
Much of what happens next will depend on how the economy
holds up, according to Florian Ielpo, Head of macroeconomics at
Multi Asset Group Lombard Odier Asset Management.
"To see the sector’s further progress we need this late
cycle context to continue and not become a recession: there, a
soft-landing is of the essence," he said, referring to central
bank's ability to bring inflation down without pushing the
economy into recession.
"Risks to (economic) growth could make a switch out of
cyclicals and toward more defensive stocks necessary," Ielpo
said.
Some retailers are considered cyclical because of how demand
for their products tends to track economic swings, while
defensive stocks, such as health care or utilities, tend to see
more constant demand.
SHOPPING AROUND
With H&M, Inditex and home improvement specialist Kingfisher
KGF.L issuing corporate updates in the next couple of weeks,
investors will have a chance to judge how the sector is coping.
WH Smith SMWH.L shares sank last week after the British
retailer reported its annual revenue jumped 28%, boosted by
strong demand during a busy summer travel season, but the lack
of upgrade to profit forecast disappointed investors.
Late last month, Alexandre Bompard, the chief executive of
French supermarket Carrefour CARR.PA warned high prices were
forcing people to slash spending and spoke of a "non-spending
tsunami".
While signs of inflation abating offer consumers some
relief, retailers may struggle to preserve profit margins,
analysts say.
JPMorgan downgraded the grocery retail sector this month and
flagged the prospect of price declines going into 2024.
Last month, Deutsche Bank, while bullish on the general
retail sector as it cited still robust consumer demand, sounded
caution on home improvement and online retail businesses.
Retail valuations do not appear stretched compared to the
broader market, with the STOXX retail index trading at 15.8
times forward earnings, compared to 12.3 for the STOXX 600,
according to LSEG Datastream.
So far about half of Europe's largest companies have
reported second quarter results. Earnings in consumer
non-cyclical companies, including grocers, fell 1.8% in the
quarter, compared to 2.4% growth in the same period last year,
data from LSEG I/B/E/S showed.
Consumer cyclical companies, such as apparel retailers,
however, are showing resilience. They reported 13.5% in earnings
growth in the second quarter, up from 10.6% last year, but there
could be harder times ahead.
In Britain, a survey showed that most stores are expecting
another tough month after retail sales fell in August at the
fastest rate since March 2021. British consumer spending growth
also lost pace last month.
In the 20 countries sharing the euro, retail sales fell for
the 10th consecutive month in July, data showed last week,
though the drop was smaller than expected as sales of food,
drink and tobacco increased.
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Roaring retailers https://tmsnrt.rs/3Zdck35
European retailers https://tmsnrt.rs/45IrjEO
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(Reporting by Joice Alves
Editing by Amanda Cooper and Tomasz Janowski)
((Joice.Alves@thomsonreuters.com; Twitter @joiceal;))