This report is an updated version of the report published on 30^th March 2022 at 7:51 AM GMT+1.

Retail Industry: UK Shoppers Set to Spend Significant Amount this Easter

 

1. UK Retail Industry Landscape

The Retail Industry forms an integral part of UK’s economic landscape. It contributed around 5.2% to the country’s gross domestic product (GDP) in 2020. The total retail sales have witnessed significant volume growth and have reportedly doubled since 1989. The retail industry in the UK encompasses entertainment, fashion, food, department stores, supermarkets, health & beauty, online retailers, to name a few. Some of the renowned retail brands in the country are Tesco, Sainsbury's, Walmart (Asda) and Morrisons.

The retail sector has witnessed a transformation in recent times with a shift in consumer behavior, preferences, and challenging economic conditions. Internet penetration has given rise to a significant push to online sales, and the onset of the COVID pandemic has further given momentum to this space.

The BRC (“British Retail Consortium”) has reported that UK retail sales grew by 6.7% on a total basis in February 2022, compared to a rise of 1% in February 2021. However, data from ONS (“Office for National Statistics”) suggests that retail sales dropped by 0.3% in February 2022, after a growth of 1.9% in January 2022. Non-store retail volumes dropped by 4.8% during the period. There was a decline in food store sales volume by 0.2%. However, non-food store sales volumes grew by 0.6%, aided by a 13.2% growth in clothing and a 1.3% increase in department stores. Retail sales were also augmented by the increase in automotive sales volumes by 3.6% during the period.

Key Trends in the Retail Sector

 Risk Exposures to the Retail Sector 

• Risk from Regulations: The retail sector is prone to Government rules and regulations and any adverse change in the law might impact the profitability of the sector.
• Inflation Concerns: The present level of high inflation is a matter of concern for the sector. The CPIH grew by 5.5% in the 12 months to February 2022, compared to a rise of 4.9% in the 12 months to January.
• COVID-19 Impact: The COVID-19 pandemic forced the shutdown of store closures due to social distancing norms and impacted the sales of retail stores. The lingering impact of the pandemic is still present and poses a threat to the sector.
• Geopolitical Tensions: The outbreak of the war in Ukraine by Russia and coupled with the expected hike in interest rate have put the equity markets under pressure during the current year.

SWOT Analysis

Retail Sector Outlook

The fall in sales growth in February 2022 was mainly on account of the dampening of consumer appetite due to rising inflation concerns and geopolitical stress. In this regard, the Bank of England will keep a close watch and a hike in interest rate may be expected in the near term to combat the surging inflation. The UK retail industry is expected to witness demand in the post COVID phase with pent-up savings of consumers and vaccine rollout to aid the sector.

2. Investment analysis and stocks under discussion (WOSG and DNLM)

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

A. Watches of Switzerland Group PLC (LON: WOSG)

(Recommendation: Buy, Potential Upside: 17.93%, Market Capitalization: GBP 2.83 billion)

Watches of Switzerland Group PLC (LON: WOSG) is an FTSE 250 listed leading luxury watch retailer with operations in the UK and US.

 

 One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                                                                                                                                       

From a technical standpoint, the MACD line has given a bullish crossover against the signal line, illustrating an upside price momentum.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 17.93% over the closing price of GBX 1,180.00 (as of 29 March 2022).

B. Dunelm Group PLC (LON: DNLM)

(Recommendation: Buy, Potential Upside: 14.56%, Market Capitalization: GBP 2.30 billion)

Dunelm Group PLC (LON: DNLM) is one of the prominent players in homewares segment, with a diverse offering to its customer base. It operates through its 175 predominantly out-of-town superstores and also its website, dunelm.com.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                                                                                                                                       

From a technical standpoint, the stock is hovering around the lower Bollinger band with low 14-day RSI levels of 41.93.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 14.56% over the closing price of GBX 1,137.00 (as of 29 March 2022).

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical issues prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing. 

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

Note 2: Investment decisions should be made depending on the investors’ appetite for 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 is subject to the factors discussed above.

Note 3: Target Price refers to a price level that 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.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement. 

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 the 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 unfavourable movement in the stock prices.

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