It’s not the only retailer to have found life tough, with everything from the cost-of-living crisis and the weather hitting performance, as shown by a profit warning from Burberry and the departure of its chief executive.
Unsurprisingly, investor interest in retail has also been soggy, but that may change. Retail Week takes a look at investor appetite for the industry.
Publicly listed companies – down but not out
So far this year retailers have underperformed the overall market, observes analyst Nick Bubb.
He notes that, while the FTSE All-Share Index is up cumulatively 6.9% so far in 2024, general retail is only ahead by 3.6%. Food retail is down by 2%, making it “one of the worst sub-sector performances in the whole market”.
That reflects specific and macro trends, says Bubb, and the two sectors’ valuations are affected by the fortunes of some of the big names within them.
Much of the poor showing for food retail, for instance, is a result of Ocado’s weak performance – down 48% in the year to date, although it climbed following interim results.
Similarly, the fortunes of JD Sports and its “exposure to the problems of Nike and the US”, the importance of France to Kingfisher and the unpredictability of the good old British weather in the cases of Marks & Spencer and Next have all contributed to investor wariness about retail.
That may not change immediately. Bubb says: “Though the consensus has been that H2 would see an improvement in consumer spending as interest rates came down, it doesn’t feel like things will turn on a sixpence and retailers still seem vulnerable to bad news, for example, the impact of the Burberry profit warning. Caveat emptor.”
Peel Hunt retail analyst John Stevenson says that at present many retailers are trading on comparatively low price-earnings ratios and that, while such ratios typically soar during booming markets, “at the bottom [of the market] you don’t get recovery multiples”.
However, he is optimistic that, in anticipation of improving conditions, investors are starting to see more opportunity in retail.
He points to the examples of sofas giant DFS and Halfords, whose share prices, although down, both improved on days they announced dismal news.
“We’re starting to see people look through current performance,” Stevenson says.
“We’re starting to get more [investor] meeting requests and calls… the noise coming from fund managers is that they’re starting to get more calls themselves.” Nevertheless, he cautions: “It’s too early to call the turn.”
Potential IPOs may stoke investor interest. A flotation of Boots is understood to have been considered, although owner Walgreens Boots Alliance eventually decided not to proceed.
Fast fashion pureplay Shein is also considering a London IPO, although controversial aspects of its business – such as its links to China and ethical concerns – may prove a problem.
Stevenson says: “The IPO market is selectively open for the right assets. If we find ourselves in a recovery market going into autumn, we may see some assets going through.”
He believes the market may be keener on founder-owned businesses rather than those controlled by private equity.
Private equity – lower interest rates could stimulate investment
The last few years have brought a raft of high-profile private equity deals, such as the acquisitions of Asda and Morrisons, and at the end of 2023 that of Body Shop – a transaction that has since become embroiled in controversy following the retailer’s administration.
At Asda and Morrisons respectively, private equity owners TDR Capital and Clayton, Dubilier & Rice (CDR) have recently overseen increased investment and further corporate activity.
TDR bought Zuber Issa’s shares, taking its stake to 67.5%. And Asda and Morrisons have both undertaken forecourt deals – Asda acquired the Issa brothers’ EG Group UK and Ireland business while Morrisons sold its forecourts to CDR stablemate Motor Fuel Group.
However, those transactions are seen as reflective of particular circumstances – such as an apparent cooling of relations between the Issa brothers at Asda and Morrisons’ need to shore up its balance sheet – rather than emblematic of ongoing private equity interest in retail industry.
On the other hand, the likelihood of lower interest rates may make it easier for private equity groups to finance deals once again.
One focus, as always, is likely to be retailers perceived to be undervalued. Following luxury goods group Burberry’s profit warning, there has been speculation that it may now be of interest to private equity players.
PwC’s leader of industry for consumer markets Lisa Hooker says: “Private equity has been a bit cautious about investing in retail. I think the deal market will be a bit up and down until after the US elections, and we’ll see a better 2025.
“With bigger [retailers] it will be because they’re good value, or it will be in areas where people are prioritising spend.”
M&A – opportunism and strategic priorities
There has been plenty of deal activity at a corporate level over the past year or two – sometimes in distress situations, such as The Range’s acquisition of Wilko’s assets or various of Next’s purchases.
However, that has not been the only reason. PwC’s Hooker identifies several objectives that have fuelled deals.
Currys, for instance, offloaded its Greek business Kotsovolos at a valuation of £175m as it chose to focus on its core markets such as the UK.
Other deals have been driven by growth potential, such as JD Sports’ $1.1bn acquisition of US business Hibbett as it pursues international opportunity, or Waitrose’s acquisition in June of meal-kit specialist Dishpatch.
There have been opportunistic moves, such as Majestic Wine’s acquisition of wine bar business Vagabond.
On top of that, investment in retailers by retailers may also be powered by a desire to get into a hot market where consumers are spending money – such as beauty – or in up-and-coming brands.
Big foreign businesses have also pondered whether to bid for UK retailers. Chinese ecomm giant JD.com considered a move on Currys but did not go ahead, while Indian group Reliance is thought to have been interested in buying Boots.
Tycoon Mike Ashley’s Frasers Group has been active. It bought Matches.com as it increasingly adopts an upscale positioning, but put the luxury fashion retailer into administration only three months later.
Frasers has also bought stakes in a raft ot retailers including Asos, AO and Currys.
While the corporate acquisitions are designed to build Frasers’ platform, the share stakes have been widely seen as opportunistic, enabling the retailer to benefit from any share price upside or to have a seat at the table in the event of third-party bid interest.
Hooker says: “What we’ve seen is investment by stronger, cash-rich players like Next or Frasers when they think there’s an opportunity to put it on their platform and give it an immediate distribution.”
Although retailers have been active, Hooker notes that consumer market deal volumes have been down for the last 18 months or so. “We’re due for the tide to turn,” she says.
Activist investors – seeking value
Activists, notably Elliott Advisors and Kelso, have been prominent players in some high-profile investment situations.
In the case of Currys, Elliott – which owns bookseller Waterstones – proposed a £757m takeover. Seen as lowball – “entirely opportunistic”, in Stevenson’s view – the interest was rebuffed by Currys.
Kelso last year bought into crafts and books retailer The Works, which earlier this year left the main market for AIM, with the objective of “helping restore the intrinsic valuation of The Works, which we believe is significantly higher than the current price”.
Kelso has also agitated at THG, where it sought a break-up of the nutrition and beauty retail and technology platform group, whose shares have performed poorly since a high-valuation IPO.
As long as retailers are trading on lowly valuations, activist investors are likely to cast their slide-rules over alternative options for the companies.
Any rise in mergers and acquisitions may also draw their interest because, as Hooker observes, they tend to be more active when that market heats up.
Improving outlook
Superdry’s Dunkerton has arranged for shares to be traded on the JP Jenkins platform, where shares in “unlisted or unquoted assets” can be traded. At the moment they are priced at £3.29. How they – and Superdry – perform remains to be seen.
However, the outlook for retail generally appears to be improving as the cost-of-living crisis abates and other macro conditions improve.
While retailers have been overlooked or attracted interest for opportunistic reasons over the last few years, they could catch the eye of a variety of types of investors as the horizon clears and a new year nears.
No comments yet