Interactive Investor

Six retail shares tipped to shine during January updates

30th December 2021 13:38

Graeme Evans from interactive investor

Many of Britain’s shopkeepers have struggled in 2021, but there are a few retail shares the experts still like for 2022. Here’s our preview of the upcoming retail sector updates.

The UK retail sector’s January trading updates are likely to be short on cheer, but if any stocks have excelled over Christmas then a City bank thinks Next (LSE:NXT), JD Sports (LSE:JD.) and Dunelm (LSE:DNLM) will be the ones.

Peel Hunt's sector preview published on 22 December also puts Hotel Chocolat (LSE:HOTC) on the winners list, with Halfords (LSE:HFD) and furniture retailer DFS (LSE:DFS) among others well placed to outperform.

The retail sector's new year reporting season is scheduled to get under way with Next and Greggs (LSE:GRG) on Thursday 6 January, although the current climate means it would be no surprise if some retailers update their City guidance earlier than planned.

The industry's headwinds have been unrelenting, with supply chain disruption compounded by the Omicron variant weighing on appetite for last-minute shopping trips.

Electricals retailer Currys (LSE:CURY) warned on 15 December that its market was softer even before the emergence of Omicron, echoing online rival AO World (LSE:AO.) after its profits warning a month earlier. Updates from Boohoo (LSE:BOO), Joules (LSE:JOUL) and (LSE:MADE) also sent their shares lower in December.

Peel Hunt's experienced retail team of John Stevenson and Jonathan Pritchard said the bigger-than-usual crop of pre-Christmas profit warnings was partly a reflection of tough year-on-year online comparatives being difficult to hurdle.

The pair's list of Christmas winners is slimmer than normal, which reflects not just the difficulty in beating sales expectations, but the confidence required in assuming this can drop through to the bottom line.

The National Living Wage is due to rise to £9.50 an hour from 1 April, an increase of 59p or 6.6% that will be one of a number of other reasons for caution at the start of 2022.

Peel Hunt wrote: “The spectre of inflation, interest rate rises and tax increases in 2022 will keep the sector in check, but also shines a light on the brightest prospects.”

Among Peel Hunt's favoured stocks, Next is seen as well placed after demonstrating its relevance to UK households throughout the pandemic. As well as a 40% increase in active customers over the past two years, the fashion retailer's demographic has broadened to include older and younger age groups.

Next shares are up 14% in 2021 but Peel Hunt sees the potential for a further 15% upside to 9,350p. The broker also describes JD's valuation as “highly compelling”, even after a 26% rise over the year and the boost seen on 21 December when partner Nike (NYSE:NKE) delivered a better-than-expected second quarter update.

Peel Hunt, whose JD price target of 260p represents a 20% uplift on Thursday's price, said: “Relationships with key suppliers continue to track in the right direction, as does JD’s brand name in many of its territories.”

Dunelm is another stock with strong trading momentum after quarterly sales at the end of September increased by 8.3% against a very strong comparative of 36.7% the year before.

Peel Hunt continues to see upside to current year revenue forecasts as the homewares chain has maintained good levels of stock availability. With shares trading on 18 times earnings, the broker said long-term total shareholder returns in the mid-teens were underpinned by strong levels of cash generation and a combined ordinary and special dividend yield of 6%.

Dunelm shares are up 14% this year but Peel Hunt reckons there's the potential to reach 1,750p. Stevenson and Pritchard also have “buy” recommendations and price targets of 450p for DFS, 525p on Halfords and 500p for Hotel Chocolat.

They said: “Hotel Chocolat has been on a roll for a while and we see no reason why the latest peak season will have been any different. Active customer numbers have risen quickly, so improved marketing techniques should keep boosting repeat rates.”

On Halfords, Peel Hunt's retail team said the growth potential in motoring services and cycling meant the stock deserved to be on more than a low double-digit price/earnings multiple.

Marks & Spencer (LSE:MKS) will be one of the retailers under most pressure to deliver, having seen a 70% rally for shares in 2021. Recent upgrades to forecasts have raised hopes that a long-awaited turnaround is finally under way, with the Christmas trading period a major test to the new-found confidence of chief executive Steve Rowe and chairman Archie Norman.

Bakery chain Greggs also has lofty expectations to meet after a 89% rally left shares at a record high. The company, which has more than 2,000 retail outlets, recently upgraded full-year expectations after revealing that like-for-like sales were up 3.5% on two years ago despite staffing and supply chain disruption.

However, reduced footfall in high street and office locations due to Omicron means recent trading is likely to have been much more challenging. Greggs remains upbeat about its longer-term prospects, with a target to double turnover over the next five years to about £2.4 billion.

Watches of Switzerland (LSE:WOSG) is another FTSE 250-listed stock whose global expansion plans have fuelled investor interest in 2021, sending shares up 161% in the process. The luxury watch retailer, which operates in the UK and US under brands including Goldsmiths, Mappin & Webb and Mayors, has not disclosed if it plans to issue a Christmas trading update but earlier this month reported a 63% jump in half-year earnings to £64.7 million.

The retail sector updates confirmed so far:

6 January
Greggs,, Next

11 January
B&M European Value Retail

12 January
DFS, JD Sports, Sainsbury's, Topps Tiles

13 January
ASOS, Dunelm, Halfords, Marks & Spencer, Tesco

14 January

18 January
Hotel Chocolat, THG

19 January
WH Smith (AGM)

20 January
Associated British Foods, Gear4Music, N Brown, Superdry (interims), Wickes

26 January
Pets at Home

27 January
Dr Martens

1 February
Joules (interims)

To be confirmed: AO World, Boohoo, Card Factory, Frasers, ScS, Ted Baker.

Next scheduled updates: Howden Joinery 24 February, Kingfisher 22 March (finals), Moonpig 5 April.

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