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Crunch time for retailers as Christmas looms large

Date: Thursday 23 Oct 2014

Crunch time for retailers as Christmas looms large

Today's retail sales figures have had a deleterious effect on the sector, writes IG market analyst Christopher Beauchamp, with the shock drop in UK consumer confidence to a four-year low adding extra weight to the gloomy outlook.
Throw in a dire update from our struggling friends at Tesco and it has not been a pretty day for the sector.

A sober look at retail sales suggests that today' figure is more of a normal return to trend, dropping back from the extreme levels we saw earlier in the summer.

UK retail sales have actually been on a rising trend since the second half of 2011, providing some reason for optimism to counter the relentless gloom that still pervades the sector.

The sector itself trades on a current PE of 16.2, only a slight premium to the FTSE 100's 15, but on a price-to-book ratio of 2.29 it is starting to look rather expensive.

Even this valuation looks too expensive when you consider that it comes after a 22.75% fall in the sector's market value.

We are around two months from Christmas Day, and thus the crucial period is beginning for the sector.

Many retailers still rely on Christmas for their overall performance, with the festive season often accounting for the lion's share of profits.

When looking to the sector, the best opportunities may lie in those companies with the lowest price-to-sales ratios.

Oddly enough this category includes Debenhams, currently on a P/S value of 0.35, and JD Sports, on 0.56.

Ones to avoid may be N Brown, the clothes retailer, currently trading at 1.09 times sales, and Dunelm Group, on a lofty 2.28 times sales.

Marks and Spencer interestingly may offer the best combination of dividend yield and earnings potential, trading on a yield of 4.09%, a PE of 12.78 and a price-to-sales ratio of 0.65.

A lot of anxious eyes will be on retail sales figures for the coming two months, lest today's numbers mark the start of something more sustained.

A bad Christmas will be dire news for the sector, but for those with a hearty appetite for risk a selection of judicious trades in the sector could reap rewards.


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