Next and Tesco soar despite death of the high street

UK supermarket shares are soaring in 2018, even with a crisis facing the UK high street. Brewin Dolphin’s equity analyst, Nicla Di Palma, explains the retail sector struggles and why supermarkets appear unscathed this year.   

Empty shops, closing down sales and tumbleweed have become the familiar and depressing reality facing UK high streets up and down the country. The British bricks and mortar retail sector is facing an existential crisis that has shown no signs of abating, and the burgeoning online retail market driven by the likes of Amazon, ASOS and Ocado is partly to blame. Brewin Dolphin’s retail analyst, Nicla Di Palma, told IG ‘the UK is one of the most developed countries when it comes to online’.

However, it is not just the British penchant for internet shopping that has created the high street maelstrom. Slow economic growth and demand from consumers has exacerbated the issue, along with increased costs from the Brexit induced sell-off in sterling and a structural excess supply of retail space. Di Palma said today ‘we simply do not need as many stores’.

What retail stores are closing in 2018?

A number of major retail outlets announced serious store closures this year. Among them is House of Fraser, which is one of the latest casualties of the high street crisis. Its landlords reluctantly agreed to a company voluntary arrangement (CVA) last week in order to save the department store chain. It will lead to around 6000 job cuts and 31 out of 59 department store closures, including the flagship shop in Oxford Street, London. Meanwhile, Debenhams announced its third profit warning of 2018 this month, sending shares down by nearly 20%. The retailer said it is expecting full year pre-tax profit to reach £35-£40 million, sharply below average analysts’ forecasts for £50.3 million. Carpetright shares closed down over 5% on Tuesday’s session this week in its worst daily performance since February, after it posted a loss of £70.5 million for the financial year ending 28 April 2018, down from a profit of £900,000 last year. The update follows the announcement earlier this year that the carpet retailer plans to slash 300 jobs and close 92 shops.

But it’s not all bad

Despite the issues facing the high street, some of the top year-to-date performers on the FTSE 100 have come from the retail sector. Shares in Next are up around 35% in 2018. Di Palma told IG that Next’s ‘digital offering is really strong and they also sell third party brands, so that’s another source of income. They really got things quite right on the logistics front and also they have much more flexibility than all the other retailers because their lease length is actually really low’.

Supermarkets are another sub-sector of retail that has outperformed this year in the UK, despite stiff competition from German discounters like Aldi and Lidl and online from Amazon. Shares in Sainsbury’s are up more than 25% in 2018, while Tesco is almost up by 23%. Di Palma said these companies are growing again as supermarkets transfer raw materials prices to the consumer and get a boost from mergers and acquisitions (M&A) activity. She said this sector is now ‘back on the map’.

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