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General rerating in 2013; winners and losers in 2014H&M and Inditex share prices are up 25% and 10% respectively so far this year, helped by a stronger consumer outlook and the UK General Retail sector is up 35% year to date, helped by a stronger UK housing market this year. This has meant that several valuations have moved towards the top end of their historic ranges. As such we expect more of a stockpickers market in 2014 and would focus on buying stocks with likely earnings upgrades and those with further structural
*What to expect for Christmas
We expect to see more frequent peaks of demand during the Christmas season as customers spread out their shopping but there should again be a late rush as customers remain event driven and have become more comfortable shopping online closer to Christmas. In electricals, tablets should again prove to be a very popular category, driven by the iPad Air. We also expect to see strong demand for gaming products, following the launch of new consoles by Microsoft and Sony.
Seasonal lines should be stronger this year in clothing but promotional intensity is likely to remain high owing to a fairly muted start to the Autumn season.
*Upgrade Dunelm and SuperGroup, d/g Carphone
We upgrade Dunelm to Buy as we expect an improving trend in LFL sales driven by a more buoyant housing market, a strong gross margin and an acceleration of space growth. We also upgrade SuperGroup owing to Retail and Wholesale momentum, multichannel initiatives and international growth. We downgrade Carphone following a strong recent run (+18% in the last 3 months) as we think its valuation now more reflects likely 4G benefits and its imminent primary listing.
* Buy the German consumer and structural share gainers
Heading into next year we think investors in General Retail should position themselves for the following key themes:
1) An improved consumer outlook for Germany;
2) The rise of the discounters;
3) Stronger UK hardlines sales;
4) Potential cash returns;
5) Further growth in mcommerce/e-commerce;
6) Southern hemisphere expansion;
7) Stable sourcing conditions;
8) UK interest rate rises;
9) Increased IPO activity;
10) Share gains by UK and overseas specialists.
* Our favourite stocks based on these themes are:
- H&M – improved offer, gross margin upside (strong EUR/cheap cotton), German
consumer exposure. Raising EPS forecasts 2%, PO SEK325 to SEK335. Prefer to
nearest peer Inditex as 22x cal. 14 P/E vs 26x for similar 15% durable growth.
- Next – online momentum, more competitive pricing, higher space, homewares
exposure, share buybacks. PBT estimates 2-4% above consensus. PO £60 to £64.
- Home Retail – improved multichannel offer, exposure to tablets and gaming,
leverage to a stronger UK housing market. PBT estimates 7-8% above consensus.
