1. UK Retail Industry Landscape

The UK retail industry is a vast and vital part of the economy.  In layman terms, retail refers to the process of selling goods & services to customers through multiple channels of distribution. Some of the broader segments in the retail industry include entertainment, fashion, food, general merchandise, health & beauty, home, sports & leisure, and technology.

The four biggest retailers in the UK are Tesco, Sainsbury, Walmart (Asda) and Morrison. Tesco holds the position of Britain’s largest retailer grocery retailer. However, value players Aldi and Lidl have also gained significant market share and closed the gap since the 2008 financial crisis. In a nutshell, supermarkets are dominating the UK retail industry. The UK industry employs around three million workers.

According to recently available data from the Office for National Statistics (“ONS”), the retail sales volumes in the UK had witnessed a spike during April 2021 as it had shown a monthly increase of around 9.2%, illustrating the positive impact of relaxation of the Covid-19 restrictions. Moreover, non-essential stores can operate in England & Wales from 12 April 2021, while they are permitted to operate in Scotland from 26 April 2021. On a year-on-year basis, the retail sales volume remained around 42.4% higher during April 2021 when compared with April 2020. Mainly, the growth was driven by strong increases of 69.4% and 25.3% in clothing stores and other non-food stores, respectively.

Moreover, the total proportion of online sales had decreased to 30.0% in April 2021 as compared to 34.7% during March 2021. Furthermore, the volume of sales remained 2.6% higher during three months to April 2021, when compared with the previous three months period driven by robust growth in department stores and automotive fuel retailers.

Growth catalysts 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 last twenty years performance, the FTSE All-Share Consumer Staples index has outperformed the FTSE 100 index, FTSE 250 index and FTSE AIM UK 50 index. Furthermore, the FTSE All-Share Consumer Staples index generated a return of about 171.68%; however, the FTSE 100 generated a return of around 23.21%, FTSE 250 produced a return of around 142.07% and the FTSE AIM UK 50 index generated a return of about 5.73%.

Figure 1: Twenty Year Benchmark Index Performance

(Analysis done by Kalkine Group)

Retail Sector Outlook

According to a recent study by industry experts, UK retail sales is anticipated to grow by around 3.9% during 2021, driven by solid forecasted growth of 28.7% in clothing & footwear retail. The UK retail industry had suffered a massive decline during 2020 because of the emergence of the Covid-19 pandemic. However, several sub-industries through the medium of online shopping performed well even during the pandemic. The industry will continue to face several headwinds in 2021, too, as the UK economy is getting transitioned from survival to recovery. Nonetheless, the improved consumer sentiments came as a sign of optimism for the industry. More recently, the Bank of England had anticipated a massive surge in household spending as the majority of the UK population is now partially vaccinated and remaining restrictions are set to be removed from 21 June 2021. Furthermore, the recent data also showed that consumer confidence during May 2021 had reached the levels last witnessed before the original lockdown in March last year.

2. Investment analysis and stocks under discussion (MONY, ASC, BVIC)

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. Moneysupermarket.com PLC (LON: MONY)

(Recommendation: Buy, Potential Upside: 22.38%, Market Capitalization: GBP 1.41 billion)

Moneysupermarket.com Group PLC (LON: MONY) is an FTSE 250 listed Company, which provides price comparison services through three brands - TravelSupermarket, MoneySuperMarket, and MoneySavingExpert.

                                                                                                                                                                                   

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 22.38% over the closing price of GBX 262.20 (as of 25 May 2021).

B. ASOS PLC (LON: ASC)

(Recommendation: Speculative Buy, Potential Upside: 24.03%, Market Capitalization: GBP 4.83 billion)

ASOS PLC is the FTSE AIM UK 50 Index listed fashion retailer (United Kingdom-based), operating globally. It was founded in the year 2000 and serving over 850 brands and 85,000 products, and catering to 24.5 million active customers.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 24.03% over the closing price of GBX 4,839.00 (as on 25 May 2021). The next important support level is at GBX 4,233.00.

C. Britvic PLC (LON: BVIC)

(Recommendation: Hold, Potential Upside: 12.29%, Market Capitalization: GBP 2.49 billion)

Britvic PLC is an FTSE 250 listed United Kingdom-based manufacturer of soft drinks. Moreover, BVIC is strongly present in Britain, Ireland, Brazil, and France.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 12.29% over the closing price of GBX 930.50 (as on 25 May 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 26 May 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective speculative buy stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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