Investors in retail stocks and shares have had a wild rollercoaster ride over recent years. In a fickle industry polarised between winners or losers, picking worthwhile and profitable investments has been a difficult art. Many have seen their investments wiped out or drop massively due to the pandemic, while some online retailers have seen their share prices soar since March’s stock market nosedive.
Despite the risk, with pitiful interest rates, even the threat of negative rates, is now the best time to invest you money in retail or fashion stocks?
The theory goes, those retailers left will be able to monopolise the retail environment and make huge profits when life gets back to some sense of normality. Brands with money have been gobbling up the competition, and, in the short term at least, they will dominate and should make the corresponding returns.
The recent successful IPO from Mytheresa (which floated this month in New York) and the impending IPO in London of cult British brand, Dr. Martens, which is set to float with an initial share sale that could value it in excess of £3bn, show there is an appetite for fashion and retail stocks.
We sound out expert investors on how best to approach the market at the moment.
Ben Hobson, Markets Editor at Stockopedia, the online stock market research platform and with over 20 years’ equity and stock market research experience, says: “In a crisis, the stock market has a habit of under-reacting to good news and over-reacting to bad news. So most retailers and fashion stocks were hit hard when prices collapsed because of COVID back in February and March 2020. That is why I think it could be a good time to invest in these sectors. We’ve already seen some of these shares recover well. If the stats are right – and Britons have managed to either save cash or slash their outgoings – then there could be a spending spree on the horizon when the restrictions are lifted.”
Noel Borg, (Twitter @Borg74), is a private investor with over 20 years’ of experience. He comments: “A host of established high street names are in trouble and have gone into administration. People are currently buying far less clothes than usual for obvious reasons.
“There has been a seismic shift in customer behaviour in respect to shopping for retail/fashion. Battered by the twin problems of lockdowns and a shift to online retailing which has accelerated rapidly this year and many high street names are in trouble.”
Adam Vettese, market analyst at multi-asset investment platform eToro, adds: “The pandemic has had a topsy-turvy effect on the fashion industry. Many fashion houses have had to manage the shift from physical to online retail, whilst also managing supply chain disruption. Add Brexit into the mix and fashion retailers are in a very different position to just 12 months ago.”
What advice would you give to investors at the moment with regards to retail/fashion stocks?
Hobson: “A lot of retail shares look cheap, but there’s a risk that they are cheap for a reason. It might be that their positioning is wrong, their online offering is wrong or their finances are laced with debt and other nasties. Unless you relish the challenge of trying to figure out which value stocks have been sold-off too heavily, it might be worth steering clear.
“A preferable alternative is to look for either ‘growth’ or ‘quality’ in a company. Those two factors aren’t mutually exclusive (you can have both), but the best performing stocks in these sectors tend to be exposed to at least one of them. They might be seeing rapid growth in sales and profits by catering to an enthusiastic demographic. Or they have very strong brands and high desirability that allows them to command wide margins and make a lot of money as a result.”
Borg: “I would be looking at ‘blue chip names’ that are primarily in the online space and or have invested in their e-commerce platforms. Companies that have changed with the times should do well as in Next plc, however, the likes of say Primark have had a reality check as they mainly turned a blind eye to their online sales.”
Is there a particular area that is better to focus on? Offline or online? Both?
Hobson: “In simple retailing terms, some of the best performing shares in fashion are online-only names like ASOS and Boohoo. There’s no doubt that these outlets have been hit because their customers can’t go out at the moment, but they are very good at the online experience. Plus they’re not encumbered in quite the same way that physical stores are. So they’ve done well in the pandemic.”
Borg: “Online. I have always liked fashion retailer Boohoo when I first stumbled upon it in 2015 at 25p and I continue to like it as a future growth company. ASOS was one of the first online-only companies to enter the market and disrupt the traditional retail model.”
Vettese: “For online only retailers it’s been another strong year. Boohoo reported 40% growth in its most recent report, and updated its full-year revenue growth guidance to 36-38%. Whereas for more traditional fashion retailers, such as Burberry, it’s been a different story – its sales fell 9% in the third quarter. Despite that, investors are bullish following recent economic growth in its key Asian markets, meaning there are signs of a bounce-back on the cards.”
“The trendsetters in the fashion world will be retailers who can manage this continued change in multi-channel operations. We’ve seen strong performances recently from the likes of Adidas, LMVH and Nike, so there is opportunity out there if brands are nimble enough to navigate the uncertain climate.”
Any particularly strong areas to look at?
Hobson: “Sports has been huge over the past year and one of the better stocks from an investment perspective is JD Sports. Because JD sells higher end sports and leisure wear than say an obvious competitor like Frasers, it’s a very profitable business. This comes back to the idea of company quality.
Borg: “JD Sports Fashion, describing itself as the ‘King of Trainers’ has done stunningly well as evidenced by its share price close to new all-time highs. Sports fashion combined with living a healthy lifestyle should continue to do well.”
Do you think we’ll see a boom post COVID?
Hobson: “Generally speaking, the stock market has really been one of the few places that you could find reasonable investment returns since the financial crisis in 2008. COVID certainly unsettled things last year and obviously a lot depends on when any kind of normal starts to unfold. But it wouldn’t be unreasonable to think that retail across the board will benefit hugely when we all get our freedom back.”
Borg: “I am generally positive by nature and therefore my bias would be that we should see a post pandemic boom. With aggregate household savings increasing over the forced months of lockdown combined with spending on clothing as people look to update their wardrobes, go out and have fun, this should all provide expansionary stimulus to a much-needed economy.
“If you are forward looking perhaps it may well be an opportune time to consider retail fashion stocks after all, considering the likes of French Connection, Burberry and Marks & Spencer, all of whom are trading well below their pre-COVID-19 levels.”
Is Dr Martens IPO a worthy investment?
Hobson: “It’s a great brand and you can imagine it will appeal to a lot of British investors. My 13 year old son is a big fan. But the question is whether its current private equity owners have done a good job of stewarding it. Private equity firms are experts at maximising their returns, and they aren’t known for selling on the cheap. So, keep an eye on the valuation.”
Borg: “That brings back memories of my rebellious teenage years during the 1980s. An iconic British brand Dr. Martens benefits from a loyal customer base and I believe sells more than 11 million pairs of footwear not only in the UK but internationally.
“The IPO will be eagerly anticipated. E-commerce is expected to remain the key growth driver over the coming years as Dr. Martens increasingly sells direct-to-consumer in a bid to control its own destiny. If that is successful it will be one new share to put on the watchlist.”
If you had to recommend one share to buy what would it be?
Hobson: ”Ah, as a retail destination it won’t appeal to everyone, but as an investment it’s hard to beat Next. It’s very well managed, it’s an expert in rolling out stores very profitably and it has a very solid credit business, too. Shares in Next are almost always quite expensive, but the cyclical nature of the whole sector (in that it collapses periodically) means that the shares do sell off sometimes. It’s close to a 52-week high at the moment, which naturally puts investors off, but it’s got a track record of being a very dependable investment.”
Borg: “Related to retail/fashion for the UK it would be JD Sports Fashion for a medium to long term investment. The company is a constituent performer, weathered the lockdown particularly well and has a robust balance sheet.”
When is a good time to sell?
Hobson: “With growth companies, the trend is your friend but be aware that markets tend to punish stocks if and when they start to slow down. With quality stocks, buy them as cheap as you can and hold them for as long as you can.”
Borg: “From a technical perspective and as advocate for sound risk management, if you hold any investment that falls below your defined risk level, for example 10% or 2% of your overall portfolio value, then it is time to call it quits on that stock for that moment in time.
“From a fundamental standpoint if the reason you invested has changed and the outlook on that stock differs from your expectations it may also be a time to sell.”
It seems reasonable to think there will be a huge retail bounce post-COVID. Those strong retailers left will be able to dominate. If a brand, like ASOS or Boohoo, is selling fashion and increasing sales in a lockdown, just imagine the potential for when people can actually go out.
They are also expanding into new territories. In the latest financial statement, Nick Beighton, the ASOS chief executive, said, “makeup, lotions and potions of all sorts” were popular as customers spent on pampering themselves during lockdown. While the reason Boohoo is buying the Debenhams brand is said to be down to its strength in beauty. And, ASOS is the frontrunner to buy Topshop, Topman and Miss Selfridge (though with the exception, perhaps, of Topshop’s London flagship, this will not be an expansion into physical retail).
Retail and fashion stocks have huge potential, but the good ones have mostly recovered to pre-COVID pricing. However, if they’re growing market share and profits, it could still be a great time to invest. When you consider you’ll be lucky to make 1% in a savings account, there’s not that much to lose, but always remember your investments can do down as well as up.