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Internet surge in retail set to continue, says BoA Merrill Lynch

Published: 12:39 26 Apr 2013 BST

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The growth in the internet activities of European general retailers has beaten BoA Merrill Lynch's expectations, and the US broker expects the trend to continue.

In a highly detailed analysis of the online boom, Merrill says internet shopping has grown ahead of market expectations set in 2010.

It highlights that online has contributed to most of the growth in the retail space - with clothing the fastest - and is a key driver for companies ambitions to expand internationally.

Interestingly, in contrast to previous viewpoints, the European department stores have actually turned the boom in online to their advantage, analyst Aurelie Caspar also notes.

The broker's top picks for structural online growth is ASOS, where it thinks the market has underestimated the long term sales potential in markets worldwide.

It also picks Yoox for its unique online business model and Sports Direct, for which online sales now represent 15% of total and which are growing at over 50% year-on-year.

For Next (LON:NXT), it rates the stock "neutral" and lifts the price target £1 to 4,700p. The N Brown (LON:BWNG) price target moves to 380p from 320p.

Next and ASOS (LON:ASC) have been the biggest winners in the clothing subsector, says the broker.

"They have also benefited from having market leading offers that they have managed to improve continuously to be one step ahead of the competition..."

"For more value-oriented investors we think Debenhams (LON:DEB) is oversold given it has recently reassured on its online prospects and in May we expect to hear from the likes of Home Retail (LON:HOME) and Marks & Spencer (LON:MKS) as to how they intend to strengthen their multi-channel offers," said the analyst.

One group estimates online spending growth in the UK, which has now overtaken the US as the most advanced e-commerce nation - will reach around £40 billion in 2014 - 15% more than an estimate three years ago, says the broker.

"We expect online retail penetration to continue to rise steadily, driven by several factors including increased broadband penetration, the rising popularity of smartphones and tablets, faster internet connections, price transparency online, broader ranges, better websites and more convenient shipping and delivery options," said Caspar.

In 2010, the broker saw rising internet sales as a net negative for the better department stores, but they have turned this to an advantage, says Caspar.

On one hand they have benefited from online spend amongst older age groups, but they have also invested significantly in their online infrastructure.

Finally, online will drive the globalisation of retail, says Merrill, because it offers "many opportunities to leverage and broaden the reach of a strong brand in a capital light and low risk way".

It also gives the chance for firms to control their brand internationally and see how strong their brand is in international markets, added the broker.

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