Black Friday boom for retail sector investors

Retail sector stocks have tested the patience and the wallets of investors for years as the industry deals with one thing after another. Finally, there has been something for them to cheer.

Bargain-hunting investors have targeted the retail sector in the run-up to the Black Friday sales after shares in the likes of Currys (LSE:CURY), Marks & Spencer (LSE:MKS) and JD Sports Fashion (LSE:JD.) surged by a third.

An overall 29% increase has made retail the best-performing sector since the current stock market revival got under way on 12 October, having been battered for much of 2022 by worries over consumer spending power, rising costs and weaker economic outlook.

The sector still ranks as the fifth worst performing out of 39 this year, but the mood going into the peak trading season suggests some traders think the worst is now in the price. The ditching of September’s mini-budget has also helped fuel the turnaround.

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There was some encouragement on this front today when Bank of America reported that UK consumer confidence has stabilised and that inflation expectations are gradually declining.

However, the conditions remain tough and there’s uncertainty over how retail footfall will fare against the distraction of wall-to-wall football over the next month.

A winter tournament at least means that electrical retailers have the opportunity to overlap their usual World Cup promotions with Black Friday ones and there’s likely to be a boost for Marks & Spencer and other chains if the football leads to an extended party food season.

But with a much greater proportion of household spending now going on bills, the need for promotional activity will be greater than ever for those retailers having to shift big-ticket items. This squeeze on margins will be exacerbated by rising costs, including staff overheads as firms help their workers to manage an inflation rate above 10%.

Bloomberg Intelligence retail analyst Charles Allen expects a focus on margins will see many retailers spread their Black Friday promotions over a longer period so they can have more control over logistics costs.

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Some retailers such as AO World (LSE:AO.) are now focused on cash generation and profitability, rather than obsessing about volumes over the Black Friday period. It’s early days for AO’s new strategy, but the former FTSE 250-listed online retailer impressed yesterday when it said that annual earnings will be at the top end of City forecasts.

The company is not expecting a let-up in the current challenging conditions, given the cost of living crisis affecting consumer spending and ongoing supply chain issues.

AO said: “The whole of the electricals market is down year on year and in light of this we continue to have a laser focus on profit and cash which will see us driving only profitable sales and channels.”

Its shares are among six London-listed retailers up by more than a third since 12 October, although in AO’s case it is still 44% lower over the year to date.

Card Factory (LSE:CARD), whose business model allows it to control costs across the design, manufacture and retail stages, has made the biggest recovery of all after shares jumped 76% to 83.2p in the past six weeks. They are now firmly back in positive territory for the year as a whole, reflecting signs of resilience in the UK’s £1.4 billion greetings card market.

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Liberum recently highlighted a price target of 110p and notes a bumper yield if the company is able to get free cash flow back to half its historical level at £30 million a year.

Other resurgent retail stocks include JD Sports Fashion and Marks & Spencer, having recently featured on a list of 41 FTSE 350-listed stocks to fall by more than 50%.

The trainers and sportswear business stood at 233p last November but fell below 90p on 12 October before a recovery of 38% to 123p since then. Marks & Spencer is up 32% and FTSE 100-listed Next (LSE:NXT) has improved 30%.

The recovery for some stocks pre-dates 12 October, with the high-yielding homewares chain Dunelm Group (LSE:DNLM) up 47% since 1 September but still 29% cheaper in the year to date.