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Greggs, JD Sports and Dunelm show the way for UK retail in H1

It’s been an awful six months for UK retail if you believe the cacophony of negative headlines about the health of the UK economy and the confidence levels of the UK consumer and shopping in the high street.

The sector is undoubtedly facing huge challenges in dealing with the evolution in on-line retailing, as well as the unwillingness of policymakers to address the changing retail environment and how business rates and general business taxation and regulation is strangling the life out of the retail sector.

Empty shops, higher wages, and rising business rates, as well as pressure on landlord rents has seen many retailers go down the route of CVA’s as margins come under pressure across the board.

It’s not just general retail that is facing challenges, its food retail as well, but as is often the case when change happens in business, it is those businesses who spot the shifts in their environment who have the capacity to adapt their business model and react accordingly, who are able to reap the benefits.

For example, over 30 years ago Tesco was a much smaller player in the UK supermarket sector than it is now, with Sainsbury at number one while the Co-op and Asda competed for third and fourth spot.

While Sainsbury’s plateaued at just over 20% market share in 1992, Tesco’s market share motored steadily higher from 13.4% in 1980 to peak at 31.1% in 2008. Even now its market share easily dwarfs its peers at 27.7 despite all of the woes and scandal it’s been through over the past five years. The Co-op on the other hand has gone from a 21.5% market share in 1976 to be barely a quarter of that now.

When looked at through this prism we can see that retailers and brands come and go, and rise and fall as new rivals disrupt the market place and we’re still seeing that now, with the rise of newcomers Aldi and Lidl in the grocery space, along with Ocado which has seen its share price rise over 50% year to date, after announcing its latest joint venture with Marks and Spencer.

For every retailer that fails to adapt another retailer tends to replace it or disrupt it, which may help explain why that despite all the doom and gloom there are still some bright spots in the UK retail space.

When looking at the performance of the FTSE 350 since the beginning of the year it is notable that the best and worst performers have come from the retail sector.

Amongst the big gainers has been Greggs share price, up over 75%, which in the past few years has gone from strength to strength. With over 1,900 outlets it has become a ubiquitous presence on the British high street, selling cakes and savoury products that cater to a wide variety of tastes.

The addition of a vegan sausage roll earlier this year prompted a lot of headlines, some of them negative, however that didn’t stop it from selling out, and now with free delivery on the Just Eat app, on trial in certain cities, Greggs has just become that little bit more accessible.

It’s also been a good first half for JD Sports Fashion share price, up over 70%, and close to all-time highs. Life for JD Sports hasn’t always been this good, back in 2012 its profits were hit hard after acquiring Blacks which cost it millions in restructuring costs. Back then the shares were down near 35p, and are now trading just below 600p.

Since then, with a combination of a sound business strategy, store renovations, and focussing on athletic inspired footwear and apparel, along with some shrewd acquisitions, revenues have gone from £1.8bn in 2016 to an expectation of £5.6bn in the upcoming financial year.

Also on the plus side Dunelm share price has also seen good gains this year, up over 65% despite a bumpy ride in 2018 after struggling to integrate Worldstores.co.uk and Kiddicare.com into its business model. By finally calling time on these brands the company appears to have turned a corner at the beginning of the year, after management reported that group revenue rose 2% over the December period.

In April the company reported like for like revenues increasing by 12.5% with on-line revenues a big factor in the outperformance, with a rise of 32.1% on the quarter, and a 34.4% rise financial year to date.

Margins also came in well ahead of expectations, rising 90bps over the same quarter last year, while net debt came down from £123.8m in 2018 to £48.3m, with management expecting full year profits to come in slightly above consensus forecasts, boosted by a buoyant homecare market.

This outperformance prompted the company to state that profits would be expected to come in above expectations for the current year. The renewed focus on the core brand appears to have reaped benefits in store and on line with increases in revenues on both sides of the ledger.

On the downside the worst performers have been Debenhams which has had a recurring problem over the last ten years, along with Thomas Cook, which has seen on-line sites like Expedia, Booking.com and AirBnB eat its breakfast, lunch and dinner.

The dream for fashion chain Ted Baker has also gone sour with its share price down just under 50%, year to date and well below its 2015 peaks of over 3,500p as management problems and slowing Asia markets have hit its margins. A series of profit downgrades over the past 18 months as promotions ate away at its margins, along with the collapse of House of Fraser and a large write down on unsold stock, have raised concerns that management have taken their eye off the ball.

The departure of founder and CEO Ray Kelvin in controversial circumstances has also been a factor, with concerns rising about the sustainability of the dividend unlikely to help steady the nerves of nervous investors.

Away from the retail sector other notable under performers this year to date have been Metro Bank which has seen its share price plunge over 65% after restating its accounts earlier this year, and then announcing a £350m capital raising to address a shortfall in its capital risk weighting.

The jury still remains out on the management team despite the new capital being raised, with its latest numbers on the 24th July likely to inform as to whether customers have started to regain faith in the bank after an increase in customer withdrawals in May when the scandal was at its height.

Construction group Kier Group’s share price has also come under pressure over concerns about the integrity of its balance sheet after it announced its debts were higher than originally estimated.

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