This year we’ve once again heard another round of proclamations on “the death of the high street”, and the decline of the retail sector. 
The list of factors to blame for poor results seems to be never-ending, ranging from the impact of online competition and insufficient online offerings, to subpar in-store experience. It has also been all too easy to use the weather as an excuse each time figures defy expectations. Whether ‘too hot’ or ‘too cold’, it seems that some retailers have been unable to find a climate that is ‘just right’ for them this year.
With footfall on the high street declining and shoppers increasingly looking online, it’s clear that the retail landscape has become significantly more complicated. Businesses like Debenhams and Footasylum have been among those to struggle in the new environment, with the former having issued three profit warnings in 2018 alone. However, those who dismiss the retail sector as a ‘danger zone’ for investing could be missing a trick. For those who look closely at the sector, there are still opportunities for both businesses and investors alike.
This can be seen in recent examples of businesses that have gotten their offerings right, such as Quiz and JD Sports. The former benefits from the versatility of a quick turnaround time, which allows it to spot and quickly respond to trends. Crucially, both have also recognised that having the right stock levels is essential or margins will suffer. For businesses who get this wrong, this can mean heavy discounting. It is also a question of having the right product and brand, while selling to the right customer. As we can see from the successes of Quiz and JD Sports, it’s clear that youth fashion remains a winner.
When it comes to the supermarkets we’ve also seen some contrast in how businesses are faring in the current environment. Last week saw conflicting results from Waitrose (under the John Lewis umbrella) and Morrisons. Where the worry may previously have been that discount stores such as Aldi and Lidl are taking market share away from supermarkets, it seems that mid-level supermarkets are fighting back. While Morrisons came out on top, Waitrose profits dropped by almost 100 per cent.
This could be due to shoppers looking for cheaper alternatives simply moving down a rung to a Tesco’s or Morrisons, rather than leaping straight to the bottom of the ladder. Morrisons is particularly well positioned to reap the benefits, as their unique offering of producing a significant amount of the food themselves may appeal to Waitrose shoppers, for whom quality is still a big concern.
It would also be remiss not to mention Brexit. It’s clear that sterling weakness can hit supermarket groups hard, as it has a significant impact on real incomes and import costs. For those like Waitrose at the top end, there is less scope to claw this loss back with price increases. However, a rise in inflation could mean that there is less ability to focus on price wars, removing some of the (previously intense) competitive pressure. We’ve seen this recently with both Tesco and Asda scrapping their price-matching schemes.
As a result, while that the retail sector is undoubtedly changing as shopping habits evolve, this doesn’t necessarily mean that it’s in decline. Businesses in the space who get their offerings right are actually flourishing, and even many of those currently experiencing speed bumps such as Footasylum still have healthy balance sheet and relatively good turnover, which from an investment perspective could make them a really exciting recovery prospect. And with a Brexit deal on the horizon, businesses could see an easing of cost pressures as our future becomes more certain and sterling recovers.
Paul Mumford is fund manager at Cavendish Asset Management. The views expressed above are his own and should not be taken as investment advice.