Rumours of the demise of the retail sector have been greatly exaggerated, but Deutsche Bank (DB) says it pays to be wary of “value traps”.
DB is sticking with its ‘hold’ rating on Marks and Spencer Group Plc (LON:MKS), Next Plc (LON:NXT) and Debenhams PLC (LON:DEB) in the clothing sector, despite the stocks trading on what might superficially appear to be low valuation multiples.
“The UK clothing retail sector may have a slightly better year in 2018, with less need for price increases; however, we still see market shares shifting towards the value retailers, disruption from the online channel shift which puts pressure on marginal profitability, and difficulties in maintaining price discipline,” the German bank said.
Among the online operators it likes ASOS plc (LON:ASC) and Boohoo.com PLC (LON:BOO), both of which are rated as ‘buys’ – the former having been upgraded this morning, with the share price rising from 5,800p to 7,400p.
Shift towards value
It is sceptical of the transformation or turnaround stories in the sector, noting in passing that there are quite a few of these, such as Carpetright PLC (LON:CPR), Kingfisher PLC (LON:KGF) and Dixons Carphone Plc (LON:DC).
Floor coverings seller Carpetright is downgraded to ‘hold’ from ‘buy’ because it feels the macro environment is not conducive to engineering turnarounds, making it “too early to play this theme”; the Carpetright target price has been cut to 200p from 250p, prompting an 8.5p fall in the share price to 166p.
On the other hand, it makes an exception for Dixons Carphone, where it says the current valuation implies zero value for the Carphone Warehouse brand.
DB’s key stock picks for 2018 are: Associated British Foods (buy; target price 3,500p); B&M (buy; TP raised to 450p from 435p); and Boohoo (buy; TP 290p).