Interactive Investor

These three retail stocks just hit trouble

29th September 2020 14:51

Graeme Evans from interactive investor

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Amid worries that consumer spending will come under pressure this winter, we look at today’s strugglers.

A recent surge in “big ticket” purchases of sofas and cars failed to protect ScS (LSE:SCS) and Pendragon (LSE:PDG) today as their shares took a beating from investors worried about the winter outlook.

The same sentiment depressed the results-day performances of Hotel Chocolat (LSE:HOTC), Card Factory (LSE:CARD) and Greggs (LSE:GRG), with only FTSE 100 index newcomer B&M European Value Retail (LSE:BME) bucking the trend.

Investors are increasingly concerned that the prospect of rising unemployment and need for more social restrictions in order to curb a second wave of Covid-19 will cut off the fledgling recovery seen in many sectors over the summer.

ScS has been one of the biggest beneficiaries, with money saved from cancelled holidays encouraging many home-bound families to focus on sprucing up their furnishings.

Annual results today revealed that recent trading has been ahead of expectations after order intake jumped 45.8% on a like-for-like basis in the first nine weeks of the new financial year.

Shares rose by as much as 41% earlier in September, but were down 7% to 204p today after CEO David Knight cautioned about the threat posed by a wider economic chill.

He said:

“We are now entering our key autumn trading period and it remains difficult to predict the potential impact of the increased economic uncertainty, including the cessation of the government's Coronavirus Job Retention Scheme at the end of October.”

The two months when the national lockdown forced all 100 stores to close meant ScS order intake was down 5.9% in the year to July 25, leading to a bottom-line loss per share of 5.8p compared with earnings per share of 28.5p a year earlier.

Car dealership Pendragon also recorded a big improvement in trading in July and August, when it made a profit of £7 million compared with a loss of £12 million for the same months last year.

Trading in the September registration month has also been strong, but Pendragon disappointed investors today by not reinstating financial guidance for the 2020 financial year.

The company added: “Whilst we are pleased with the performance to date in quarter three, we remain cautious about the outlook for the remainder of the year given the material uncertainty that exists once government economic support is withdrawn.”

Shares were down 6% to just above 7p, which compares with the 10p seen after the re-opening of its dealerships in the wake of the Covid-19 lockdown.

They were 8.8p earlier this month after CEO Bill Berman published an updated strategy or “roadmap” under which he is targeting underlying profits of £85 million to £90 million by 2025. The company made a half-year loss of £31 million in today's interim results.

The plan features a greater focus on the used car market, plus more digital innovation and the growth of its Pinewood division, where the dealer management system and customer relationship management tool has been achieving compound revenues growth of 10%.

Berman said today:

“While there is some distance still to travel, we remain firmly committed to achieving our twin goals of sustainable profit growth and attractive returns for shareholders."

Card Factory is also attempting to roll out a new growth strategy, despite being in the teeth of a retail storm. Its five-year plan includes a target for revenues of £635 million, of which about a fifth will come from online and retail partnerships.

The revenues figure in results for the six months to July 31 was £100.5 million, down from £195.6 million a year earlier after the closure of more than 1,000 stores in the UK and Ireland over a period including Mother's Day, Easter and Father's Day.

Trading since the reopening of stores has been better than expected, albeit with like-for-like sales still down 13.6% in the 14 weeks to September 20. While reduced high street footfall has caused transaction volumes to fall 30%, customers are spending more in stores after a 24% increase in the average basket value.

One of the attractions of Card Factory shares over recent years has been its run of special dividends since the 2014 IPO, which reflects its vertically-integrated cash generative model. Shareholder payments are on hold for the foreseeable future, although cost efficiencies did enable the company to maintain free cash flow over the six-month period.

Shares were 3% lower at 35.7p, which is near to the 28.6p low seen in May. They had been trading at 170p towards the end of last year.

The disruption to seasonal trading caused by the lockdown was also felt at Hotel Chocolat, which reported underlying profits of £2.4 million for the year to 28 June compared with £14.1 million a year earlier. Its physical outlets typically generate about 70% of second-half sales but were closed for 12 weeks, including Easter.

Trading has been in line with management expectations for the first 12 weeks of the new financial year, with digital demand up over 150% on the same period a year ago. Shares were 9p lower at 341p today, having rallied to 393p earlier this month.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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