Retailers caught by windfall fever

After last year’s disastrous performance the retail chains are pinning their hopes on 1996 – the year of the cash windfall.

It has never happened before, and it may never happen again. Shoppers are about to get the biggest cash windfall they have ever seen.

It is probably no coincidence that 1996 is the year when the Tessa savings schemes mature, when the privatised utilities give consumers a one-off payment after making excessive profits, and when the demutualisation of building societies means savers and borrowers alike will receive between 500 and 1,000 cash bonus. It is no coincidence that this is also the year when the Government’s chances of winning a general election will be decided.

Retailers are rubbing their hands at the thought of how shoppers will spend this estimated 30bn extra. While much of this cash will be reinvested in savings and used to clear debts, some of it will seep through to consumer spending.

After a miserable year in 1995, when freak weather ruined many retailers’ stock plans, and recovery seemed to slip through their hands, at last they have something to look forward to, even if it is a one-off.

This upbeat mood is reflected in the leading retailers’ share prices, which have, with few exceptions, risen over the past three months. But the City does not expect there to be a uniform rise in retailers’ fortunes. As NatWest Markets stores analyst Sean Eddie puts it: “Retailing remains very difficult. While 1993 and 1994 saw a reasonable upturn in consumer spending, there was a major hiccup in 1995. It is hoped that 1996 will revert to the recovery path. It is the market for durable goods that is more geared to the windfall cheque.”

This will benefit retailers selling higher ticket items such as carpets, kitchens and electrical goods. Looking back at last year, the best performers were those selling household durables – Argos, Carpetright, DFS Furniture and Dixons. Indeed Dixons has seen its share price improve by 13.7 per cent in the past three months, partly on a strong Christmas trading statement.

Even the once dowdy Kingfisher has seen its share price rising, although broker Kleinwort Benson is sceptical about its ability to synchronise an upturn across its different businesses. Its electricals chain Comet is unlikely to fare as well as Dixons, given lower investment and poor condition of its estate.

While consumer durables are doing well, the DIY market remains fairly depressed. To add to this over capacity, Do It All stubbornly refuses to go away. While many are expecting its joint owners Boots and WH Smith to axe the troubled chain, the two are not willing to stump up the 175m that it would cost to close Do It All down.

WH Smith has recently issued a profit warning, while its rival news and stationery seller John Menzies is one of those few retail stocks to see its share price fall over the past three months. It declined by nearly 12 per cent, although it has recovered over the past month, partly on bid speculation.

Menzies has been mentioned as one of the companies ripe for takeover by broker Panmure Gordon in a note issued two weeks’ ago. Other retailers identified as potential bid targets include duty-free operator and department store Allders and clothes retailers Sears, House of Fraser and Etam.

House of Fraser has seen its share price rise by up to seven per cent over recent weeks on news that the company was organising a management reshuffle following the departure of managing director Andrew Jennings. Speculation is mounting that the chain will bring former Storehouse chief David Dworkin back from the US to head the operation. But such a move is more likely to indicate HoF’s commitment to battling on alone, rather than looking for a sell-off. However, it is conceivable he could be brought in to patch up the chain in preparation for a sell-off.

The great monolith of the stores sector Marks & Spencer remains stable, but its performance is unspectacular. Broker UBS has been negative about M&S for some time. While the chain would be well placed to benefit from a mini-consumer recovery, analyst Andy Hughes says: “M&S needs more self-help – it is underselling on its home furnishing catalogue, which it should be shouting from the rooftops. Either it should push the button on more marketing spending or make more use of its Charge Card holders’ list.”

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