7 September 2017
Retail - Non Food
UK Non-Food Retail
Retail
Retail - Non FoodRecommendation
Change
Europe
United Kingdom
Industry
UK Non-Food Retail
Date
7 September 2017
Deutsche Bank
Markets Research
Value not value traps
UK non-food outlook appears bleak, except for the value and online retailers
Two years ago we asked where has the money goneˉ. Household disposable
income had been strengthening but general retail sales growth had not.
Unfortunately, the answer was not that households had been re-building the
savings ratio: this had fallen from 12% in 2010 to 8% by 2015, and has since
tumbled to just 1.7% in Q117. Many other economic indicators today are trending
similarly to the austerity years of 2011/2- not a disaster given the political
upheaval of the past two years. We think the squeezed consumer will seek out
value and we see AB Foodsˉ Primark and B&M as well-placed to benet from this
trend. We reiterate our Buy ratings on both stocks, raising our forecasts and price
targets and reconrm Boohoo as our top pick in the online space. Elsewhere we
generally cut forecasts and downgrade WH Smith, one of our favourite stocks of
the past decade, from Buy to Hold on valuation grounds.
We expect a no-growth environment for non food retail -
The current UK environment is tough but not disastrous, as we show from our
review of macro indicators. While there are some supportive factors, the savings
ratio at a 20-year low is of greatest concern. Overall consumption has not yet
slowed materially: total UK retail sales growth has actually remained quite healthy.
However, non-food retail sales growth has been lagging leisure spend for some
time and, for the past year, has also lagged food retail sales growth, like it did in
the inationary austerity years at the start of the decade.
This part of the cycle should benet the value retailers. There is evidence of
consumers trading down in our apparel consumer survey, in the grocery industry
and in the acceleration of growth at Primark and B&M. There are some counter-
intuitive behavioural shifts - apparel prices are rising and consumers are showing
signs of discount fatigue - but we also demonstrate some more intuitive trends,
such as M&S Food underperforming the market in periods of recession. Structural
change also favours the value retailers which, together with online retailers, oer
faster growth rates in a fragmenting market.
Top picks AB Foods, B&M, and Boohoo; downgrading WH Smith to Hold
This report changes ratings, price targets, and/or estimates for several companies,
detailed in Figure 1. We reiterate our Buy ratings on AB Foods, B&M and Boohoo
while we downgrade WH Smith on valuation grounds. Elsewhere we generally
cut 2018/9 forecasts on the back of a more conservative sector outlook.
Warwick Okines
Research Analyst
+44-20-754-58546
Charlie Muir-Sands, CFA
Research Analyst
+44-20-754-75749
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