These retailers offer investors rich rewards

Fears of a nightmare Christmas for the UK retail sector have proved wide of the mark. Graeme Evans analyses the latest updates.

It takes a brave investor to bet on bombed-out retail stocks at the moment, but any that did over the Christmas period will have been richly rewarded so far. 

Take the examples of Primark owner Associated British Foods (LSE:ABF) and GAME Digital (LSE:GMD), whose updates today highlight that the mood on the high street wasn’t quite as bad as the headlines suggested in the run-up to Christmas.

The pair's shares are now up 12% since the close on December 27, mirroring performances elsewhere in the retail sector. Industry bellwether Marks & Spencer (LSE:MKS), for example, is up 16% to 281p from its Christmas week low of 240p.

Online fashion chain N Brown (LSE:BWNG) - the other major retailer to report today - is up 8% although it bucked the trend today when its shares fell 5% despite a reassuring trading performance over the festive period.

AB Foods probably offers the best protection against current retail conditions, given the ongoing popularity of Primark and the diversity the conglomerate gets from its grocery, ingredients and agriculture divisions.

Even so, shares recently threatened to dip below £20 for the first time since 2013. However, a rebound since Christmas accelerated today with a 6% rise after the company said the reduced footfall that impacted Primark's UK stores in November had been followed by a better-than-expected festive period.

Source: TradingView (*)  Past performance is not a guide to future performance

Overall sales at Primark were 4% ahead of last year in the 16 weeks to January 5, driven by increased selling space. Crucially, this was accompanied by a higher operating profit margin.

Other parts of the group also grew sales while the embattled sugar division is seeing early signs of a recovery in EU sugar prices.

With the stock 25% lower over the past 12 months, analysts at Credit Suisse said the shares were "very attractive" at a price/earnings multiple of 14.7x excluding sugar.

The bank has a price target of 2,630p, which would have been 2,950p were it not for the lower valuation multiples of peers in the retail and staples sector.

Analyst Simon Irwin believes Primark is significantly undervalued by the market at 9.4 times underlying earnings, particularly as the chain remains "virtually the only major apparel retailer to be consistently taking market share".

He added:

"With the prospect of better trading through the rest of the year, margin upside and with the sugar cycle potentially starting to turn, the shares look very attractive."

His 'buy' recommendation is mirrored by UBS analyst Andrew Hughes, who thinks that shares can trade above £30 for the first time since 2017.

Elsewhere in the retail sector today, shares in gaming business GAME Digital surged 12% after it reported a 2% rise in like-for-like sales over the seven-week Black Friday and Christmas period. Gross margins also improved, helped by exclusive products, a better mix and higher promotional pricing rates.

Source: TradingView (*)  Past performance is not a guide to future performance

Canaccord Genuity, which has a 60p price target, said the current share price overstated the threat posed by streaming and retail conditions, while downplaying the management’s recent strategic repositioning.

This includes the focus on higher margin formats, such as the collaboration with Sports Direct International (LSE:SPD) to roll out more BELONG live gaming arenas.

Analyst Caspar Trenchard said:

"As legacy value trap perceptions fade in response to the business transformation, we believe the shares offer steep recovery potential."

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Meanwhile, N Brown will be hoping that its resilient performance over Christmas is the start of an upturn in share price fortunes after it was recently forced to rebase its dividend to a more sustainable level.

Sales from its power brands were 0.1% higher in the 18 weeks to January 5, driven by continued growth from Simply Be and Jacamo. Margins were stable in what was a "challenging and highly promotional peak trading period".

Source: TradingView (*)  Past performance is not a guide to future performance

The update appeared to have little impact on the City's full-year guidance or forecasts, although Peel Hunt did reiterate its 'Add' recommendation and target price of 150p.

With N Brown trading on a PE multiple below 5x, the broker said shares offered long-term value, albeit held back at the moment by a lack of short-term trading or strategic catalysts.

Stifel notes that the stock is trading at a 60% discount to the sector, with an attractive dividend yield of 7.1% — assuming the pay-out is held at the year end. The broker has a ‘hold’ recommendation and 141p target price.

Its analysts said:

"We fear additional earnings weakness in the medium term, and the company continues to identify the right product proposition in a highly competitive online clothing environment."

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.