The turnaround plans of Carpetright PLC (LON:CPR) and other UK retailers could be hampered by macro-economic challenges this year, Deutsche Bank has warned.
In a note on European non-food retailers, the German bank downgraded Carpetright to ‘hold’ from ‘buy’ and cut its target price to 200p from 250p.
It said increased competition and a sluggish consumer environment have meant improvements Carpetright has made to its brand, property portfolio and range have not driven profit growth, though it has boosted shares by 13% in the year to date.
The Brexit vote has sent the pound lower and pushed inflation higher, putting a squeeze on consumers last year.
Deutsche Bank expects the consumer squeeze to continue this year, making it difficult for the overhaul of UK retailers, including Carpetright, Debenhams PLC (LON:DEB), Dixons Carphone Plc (LON:DC), Kingfisher PLC (LON:KGF) and Marks and Spencer Group Plc (LON:MKS).
“The one exception is Dixons Carphone, a transformation story we are prepared to back because we think the current share price implies no valuation for the Carphone brand,” the bank said, reiterating a ‘buy’ rating and target price of 250p.
Deutche Bank upgrades ASOS
On the upside, it believes ASOS plc (LON:ASC) will continue to benefit from the consumer shift toward online shopping. Deutsche Bank upgraded the online fashion retailer to ‘buy’ from ‘hold’ and lifted its target price to 7,400p from 5,800p.
“Growth in 2018 should again be underpinned by a high pace of active customer number additions, as well as expansion into the athleticwear and beauty categories,” Deutsche Bank said.
“Customer number additions are likely to be strongest in Europe, supported by the superior service now possible with the fully operational Eurohub in Germany.”
Primark, B&M and Boohoo top picks
Deutsche Bank said its top picks of the non-food retail sector are still Associated British Foods’ (LON:ABF) Primark, B&M European Value Retail (LON:BME) and Boohoo.com PLC (LON:BOO.L), repeating a ‘buy’ rating on the stocks.
The bank expects hard-hit consumers to continue to seek out value in 2018 and believes Primark, B&M and Boohoo are best placed to benefit from this trend as they offer low-cost items.
These so-called value retailers are "high-multiple stocks, but all offer structural growth and are well placed within the cycle", the bank said.
It added that online apparel retailers ASOS and Boohoo are “more attractive investments, have more differentiated propositions, and can drive superior growth versus the platforms Zalando (Sell) and Showroomprive (Hold).
“We expect superior growth from these brands, and believe that their more differentiated propositions can ensure better long term prospects.”
Better year for retailers expected but headwinds remain
Deutsche Bank anticipates a “slightly better year” for UK apparel retailers in 2018 with less need for price increases. However, it still sees market shares shifting to the value retailers, disruption from the online channel shift hitting marginal profitability, and difficulties in maintaining price discipline.
The bank also thinks travel retailers are defensive to wider industry pressures due to “structural growth in traffic of a captive audience” and prefers Dufry (Buy) over WH Smith Plc (LON:SMWH) (Hold) from a valuation perspective.
The note comes ahead of a slew of Christmas trading statements from UK retailers over coming weeks. Next Plc (LON:NXT) reports on Wednesday while Ted Baker PLC (LON:TED),M&S, Debenhams and John Lewis update the market next week.