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Debenhams collapse: where next for UK retail stocks?

Debenhams collapse: where next for UK retail stocks?

The collapse of Debenhams into adminsitration yesterday, after the last in a series of offers from Sports Direct (SPD) boss Mike Ashley to take control of the business was rejected, provided the latest bleak milestone for the struggling UK high street.

But has the death of retail been overhyped, throwing up opportunities as quality stocks are caught in the broader sector’s fall from favour?

Mark Swain, co-manager of the Smith & Williamson Enterprise fund, believes so.

‘The general picture of UK retail isn’t particularly rosy, but there are still pockets that are still quite attractive,’ he said.

Strong results from Tesco (TSCO) have meanwhile checked the gloom surrounding the retail sector. 

The supermarket today announced a near-doubling of its dividend alongside full-year profits up by a third.

More cash to spend?

Andy Brough, manager of the Schroder UK Smaller Companies and UK Mid 250 funds and Schroder UK Mid Cap (SCP) investment trust, is ‘cautiously optimistic’ on UK retail, despite widespread pessimism.

He highlighted the resilience of UK consumer spending, which rose by £52.5 billion in 2018, despite Brexit uncertainty.

Brough added the income tax changes that came into force in April shoudl also boost spending. The personal allowance, the amount of income on which tax is not due, has risen from £11,850 to £12,500, while the threshold above which higher rate tax applies has risen from £46,350 to £50,000.

Swain echoed this, adding: ‘Utility costs aren’t going up as much as wage growth. However, what people do with their disposable income is another thing. There has been a trend towards more spending on experiences rather than on the high street.’

Luring overseas investors back

Brough added that international investors had been avoiding UK equities, and any reduction in uncertainty over Brexit could encourage them back.

‘The negativity of international investors towards UK equities is entrenched – global fund managers have been consensually “underweight” the UK for three years.

‘Should the tide turn and capital flow back into the UK, the more domestically-focused mid cap equities, home to many of the UK’s quoted general retailers, could do relatively well. The scope for any potential recovery looks good considering that UK mid caps have only risen 21.7% over the past three years.’

Swain added: ‘UK assets have been off the radar since the referendum, and there have been significant flows out of UK funds, but the US is already warming to UK assets.

‘The UK is one of the most under-owned geographies, and UK assets are trading at a discount. There is an opportunity, as UK consumer companies are trading at an even greater discount.’

Where are the opportunities?

Swain cited JD Sports (JD) as a favoured play in the sector and it is a 2.5% position in his fund. He said the growing popularity of ‘athleisure’, paired with JD Sports’ acquisition of Finish Line in the US, had made the stock a strong investment prospect.   

Swain is also optimistic about Tesco, his top holding in the fund, at 3.5% of the portfolio.

‘Tesco’s market growth has been exceeding its space growth. After a decade of headwinds, these have now reversed for the supermarket. The Sainsbury’s-Asda deal also looks to be dead in the water, and that isn’t going to do Tesco any harm,’ he said.

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