1. UK Retail Industry Landscape

The UK Retail industry encapsulates companies from several industries such as entertainment, fashion, food, general merchandise, health & beauty, home, sports & leisure, and technology. Moreover, some of the prominent names in the UK retail industry are Tesco, Sainsbury, Walmart (Asda) and Morrison. Tesco holds the position of Britain’s largest grocery retailer. The UK industry employs around three million workers.

Many areas of the retail industry have profited from spending displacement in travel, leisure, and hospitality during period of lockdown. As a result, the customers restore trust in specific sectors, and demand in other retail industry segments may be suppressed.

According to the latest figures from the Office for National Statistics, the UK retail industry improved at the start of 2022 following a poor December caused by the Omicron form of Covid-19. After a 4.0% monthly drop in December 2021, retail sales in the United Kingdom increased by 1.9% in January 2022. This was better than the 1% forecasted growth.

Key Trends in the Retail Sector

Risk Exposures to the Retail Sector

• Reduction In Consumer Spending: The rise in unemployment levels and reduction in disposable income may cause a decline in consumer spending tendency, which could adversely impact consumer demand.
• Product Boycotts: The product boycotts might lead to a drop in sales; many retailers still fear them.
• Digital Theft & Data Breaches: With a rise in online sales activity post Covid-19 pandemic, there is also an increase in e-commerce crimes. Moreover, digital criminals sought out innovative ways to target online retailers.

SWOT Analysis

Benchmark Index Performance

Based on the last two years performance, the FTSE All-Share General Retailers index has outperformed the FTSE 100 and FTSE 250 indices. The FTSE All-Share General Retailers index generated a return of about 8.45%; however, the FTSE 100 produced a return of around 4.71%, and FTSE 250 generated a return of negative 0.59%

Figure 1: Two Years Benchmark Index Performance

Retail Sector Outlook

The industry would face severe competition from the hospitality and leisure sector for the consumer’s money saved during the lockdowns. Several factors like confident consumers, pent up savings & demand, and successful vaccine rollout would boost up the growth of the industry. The industry will continue to face several headwinds in 2022, too, as the UK economy is getting transitioned from survival to recovery. Overall, the Bank of England will also keep a close eye on consumer spending to decide various measures taken to control the rising inflation rates.

 

2. Investment analysis and stocks under discussion (BOO, HFD, and TSCO)

After gaining insights into the Retail sector, we would look at the business model of three Retail players listed on the London Stock Exchange.

A. Boohoo Group PLC (LON: BOO)

(Recommendation: Speculative Buy, Potential Upside: 17.65%, Market Capitalization: GBP 1.12 billion)

Boohoo Group PLC (LON: BOO) is listed on the FTSE AIM 100 Index. The Company is a British online fashion retailer that specialises in own-brand fashion clothes with over 36,000 products.

 One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is trading between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price. Moreover, the 14-days RSI of ~32.30 indicates an oversold territory.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 17.65% over the current price of GBX 86.87 (as of 23 February 2022 at 08:32 AM GMT).

B. Halfords Group PLC (LON: HFD)

(Recommendation: Speculative Buy, Potential Upside: 19.05%, Market Capitalization: GBP 622.63 million)

Halfords Group PLC (LON: HFD) is an FTSE All-Share listed company. It is a retailer of driving and cycling items and services in the United Kingdom. They provide car service, MOTs, maintenance, and repairs in the United Kingdom through Halfords Autocentre.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the 14-days RSI of ~24.64 indicates an upside potential in the stock price. Moreover, the stock is hovering around the lower Bollinger band, reflecting a bullish price momentum.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 19.05% over the current price of GBX 283.40 (as of 23 February 2022 at 08:13 AM GMT).

C. Tesco PLC (LON: TSCO)

(Recommendation: Watch, Potential Downside:29.72%, Market Capitalization: GBP 21.98 billion)

Tesco PLC (LON: TSCO) is an FTSE 100 Index listed British grocery and general products retailer in Welwyn Garden City, England.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the MACD line has given a bearish crossover against the signal line. Thus, the stock price may decline in the near term.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 29.72% over the current price of GBX 288.15 (as on 23 February 2022 at 08:36 AM GMT).

* Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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