Consumer confidence remains surprisingly high in the wake of Brexit, but these are early days. High street retail chains could be right in the firing line if the mood darkens. The following offer cheap valuations and high yields, but there may be trouble ahead.
Off your Marks
Marks & Spencer Group(LSE: MKS) needs all the good news it can get these days, given a 33% share price drop in the last 12 months. It enjoyed brief respite on Tuesday when latest sales figures from the British Retail Consortium showed food sales strong and consumer confidence still high. Even though clothing has dipped, this lifted sentiment and the report added 3.5% to the company's share price.
However, the BRC also warned that sterling's fall from grace will drive up import costs and shop prices, especially if there's no trade deal and the UK falls back on to World Trade Organisation rules. In this case, duty on meat imports could hit 27%, with tariffs on clothing and footwear up between 11% to 16%, squeezing both prices and margins.
Nobody is worried about M&S food sales, unlike the big supermarkets it appears to have cracked this difficult sector, while failing to decipher the code to higher clothing sales. Now it faces the further headwind of rising import costs, which will strengthen once its currency hedges run out next year. Margins are already being squeezed by the CEO's strategy of lowering prices on clothing.
The chain's forecast valuation of 10.6 times earnings may look tempting, especially alongside the predicted 6.3% yield. But they're also an indication of a company in trouble, and there are difficult times to come.
Food fight intensifies
First, to important matters: you can still buy Marmite at Sainsbury's(LSE: SBRY). You might struggle at Tesco, which has axed the spread after rejecting Unilever's demand for a 10% price hike across 200 items to offset the falling value of sterling. This high-profile spat highlights the pressure the big supermarkets are likely to face as Brexit sends an inflationary pulse rippling through the economy.
Food sales remain strong for now but much depends on the outcome of Brexit negotiations. Higher prices are the last thing supermarkets need as they slice margins to the bone in a desperate bid to win an unwinnable price war - unless a hard Brexit stops German discounters Aldi and Lidl from gobbling up yet more market share.
Worryingly, Sainsbury's seems to be losing the grocery price war at the moment, with Q2 like-for-like sales down 1.1%, despite a 4% rise in general merchandise sales. And that's at a time when consumers are still confident. This may change once Article 50 is triggered and Brexit negotiations are underway.
Arguably, this supports chief executive Mike Coupe's strategy of diversifying out of food: the big question is whether his recent purchase of Home Retail Group's Argos can deliver sales growth. There are undoubted synergies and the firm's unveiling of the Nine Elms store this week with its Mini Habitat and Argos concession looked good. But so far it's too early to say. Sainsbury's isn't overpriced, trading at a forecast valuation of 11.2 and yielding 4.6%, but the grocery business continues to look stale.
The doom-mongers say Brexit is a disaster for the UK, but so far it has been a real boost for the FTSE 100. Still, it's early days and if Britain does slide into recession the turbulence will return with a vengeance.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.