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.

According to recently available data from the Office for National Statistics (“ONS”), the retail sales volumes had shown a moderate growth of around 0.5% during June 2021 as compared to May 2021 and an increase of about 9.50% when compared with the pre-pandemic period of February 2021. Furthermore, the sales volumes from food stores had contributed the maximum growth as it jumped by approximately 4.20% during June 2021, boosted by the start of Euro 2020 football championship. Meanwhile, the online sales activity had started showing a dip as consumers returned to physical stores. The total proportion of online sales had reduced from 28.4% in May 2021 to 26.7% in June 2021.

As per the leading market researcher, the proportion of British online shoppers has shown a significant drop of almost 20% for the 12 weeks period ended 08 August 2021. The percentage of grocery sales made online had also demonstrated a noticeable drop from the peak of around 15.4% during February 2021 to 13.0%.

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.
• Brand & Customer Loyalty: Customers always seek the best prices with their favoured brands. For a small store’s long-term success, repeat customers and a loyal customer base are very important. Any small negligence or mishap can force you to shut your doors forever.

SWOT Analysis

Benchmark Index Performance

Based on the one-year performance, the FTSE All-Share Retailers index has outperformed the FTSE 100 and FTSE 250. The FTSE All-Share Retailers index generated a return of about 38.16%; however, the FTSE 100 generated a return of around 17.19%, and FTSE 250 generated a return of around 33.24%

Figure 1: One Year Benchmark Index Performance

(Source: Refinitiv; Analysis done by Kalkine Group)

Retail Sector Outlook

According to the leading economist from the Confederation of British Industry, the consumer demand will support Britain’s economic recovery. However, clothing & footwear stores are yet to witness the resurgence in demand levels. Nonetheless, the UK retail sales is estimated to show a marginal growth ranging from 0% to 3% during H2 FY21. As the economy opened, 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 2021, 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 (DNLM, HFD, FRAS)

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. Dunelm Group PLC (LON: DNLM)

(Recommendation: Buy, Potential Upside: 21.32%, Market Capitalization: GBP 2.64 billion)

Dunelm Group PLC (LON: DNLM) is an FTSE 250 Index listed company operating in UK Homewares Market with nearly 174 stores.

The company will release its annual results for FY2021 on 8 September 2021.

DNLM had paid an interim dividend of 12 pence per share on 09 April 2021, while the ex-dividend date was 18 March 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 21.32% over the closing price of GBX 1,307.00 (as of 17 August 2021).

 

B. Halfords Group PLC (LON: HFD)

(Recommendation: Speculative Buy, Potential Upside: 27.97%, Market Capitalization: GBP 744.70 million)

Halfords Group PLC (LON: HFD) is an FTSE All-Share listed company engaged in retailing Cycling, motoring, and leisure products.

The Company will pay a final dividend of 5 pence per share on 17 September 2021, while the ex-dividend date was 12 August 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the MACD line remained above the signal line, indicating an upside potential in the stock price. Moreover, the 20-days exponential moving average price of GBX 372.00 is also supporting the upside potential.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 27.97% over the closing price of GBX 374.00 (as on 17 August 2021).

C. Frasers Group PLC (LON: FRAS)

(Recommendation: Expensive, Potential Downside: 23.43%, Market Capitalization: GBP 3.22 billion)

Frasers Group PLC (LON: FRAS) is an FTSE 250 index listed UK-based sporting goods retailer. It was formerly known as Sports Direct International PLC.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the momentum indicator 14-day RSI (~61.65) is inching towards an overbought zone and suggesting a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 23.43% over the closing price of GBX 628.00 (as on 17 August 2021).

*All forecasted data and peer information have been taken from REFINITIV.

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

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 18 August 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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