After a turbulent week for technology stocks, investors may be searching for a steadier corner of the market, despite yesterday’s recovery.
One possible destination is closer to home: the High Street. Could Christmas shopping provide the retail sector with a timely lift during its most important trading season?
The festive push is already under way, tugging at the nation’s emotions while encouraging shoppers to open their wallets.
Marks & Spencer, Tesco and John Lewis have all launched their Christmas advertising campaigns this week.
On Monday, the lights on Oxford Street will be switched on in a Harry Potter-themed celebration.
Retailers along Britain’s most famous shopping street will be hoping the young wizard’s magic can improve consumer confidence, even as interest rates and inflation continue to rise.
Turbulence: Investors shaken by this week’s tech stock tumult may be looking for a less troubled zone, despite yesterday’s rebound
A more guarded outlook was clear in this week’s results from M&S, Next and Associated British Foods’ fashion chain Primark.
These retailers, like many others, are also dealing with higher tax bills and rising operating costs.
Lucy Rumbold, an equity analyst at Quilter Cheviot, says: ‘Christmas will be the key near-term test for the retail sector.
Higher energy and agricultural input costs could add to inflationary pressure – and eventually push up food prices.
Competition between supermarkets remains fierce, meaning retailers are unlikely to pass the entire increase in costs on to shoppers.’
Even so, the picture may not be quite as bleak as it first appears. Stuart Machin, chief executive of M&S, says: ‘Everything is pointing to people saying: ‘‘We’re worried about the cost of living.’’’
However, he believes many consumers are putting money aside so they can treat themselves at Christmas. Machin has already positioned M&S as the ‘Home of Christmas’.
So which other retail shares could deliver some festive cheer?
Festive fare
Investors are looking for supermarket groups with ‘sources of growth beyond the traditional shopping basket’, Rumbold says.
That includes rapid-delivery services, for which customers may pay up to 45 per cent more for their goods, as well as ‘retail media’ – advertising and brand promotion on in-store screens and social media, frequently involving influencers.
Tesco, the £34.5billion supermarket giant with 28 per cent of the UK grocery market, has seen its shares climb 25 per cent this year to 554p.
The rise accelerated this week after the retailer released its Christmas advert, a story about friendship being rekindled. The campaign may have helped convince investors that shoppers will respond warmly to Tesco’s festive offering.
However, the stronger share price is mainly linked to Tesco’s expansion of retail media and a 37 per cent increase in first-half revenue from its rapid-delivery business, Whoosh.
Tesco’s well-regarded operational efficiency should also help it maintain its position in the aisles, even as the grocery price war shows no sign of easing.
I bought Tesco shares in February 2024 at 284p. As I explained in this column, I was impressed by its F&F clothing range, which offers more style for less money, and by the supermarket’s Finest food products.
Both ranges continue to perform strongly, so I intend to hold the shares. In my view, Tesco is a stock not only for Christmas, but for the long term.
Analysts are more cautious about Sainsbury’s, rating it a hold at 355p, although the shares are 9 per cent higher than at the beginning of the year.
Still, food retailers are traditionally viewed as a dependable portfolio holding during difficult periods. Sainsbury’s premium Taste The Difference range could also appeal to families seeking a restaurant-style meal at home without the accompanying expense this winter.
Home for the holidays
Home decoration becomes a priority in December, whether households are preparing to entertain guests or simply putting up their Christmas decorations.
Homeware and furniture retailers B&M and Dunelm could benefit from that seasonal demand, although both shares depend on a recovery that may prove difficult to achieve.
B&M’s shares remain 55pc below their level five years ago. They have, however, rebounded this year, gaining 66 per cent to 280p.
The recovery reflects hopes that the group’s ‘Back to B&M basics’ turnaround plan is making visits to its discount stores a less frustrating experience.
Ahead of Thursday’s first-half results, most analysts regard B&M as a ‘hold’. Brokers Berenberg are more positive, having lifted their target price to 340p. If the struggling Poundland chain is forced to shut stores, B&M could be well placed to sell bargain Christmas decorations.
Dunelm shares have fallen 18 per cent since January to 900p, partly because the retailer failed to capitalise fully on hot-weather demand for fans and garden bistro furniture.
Analysts are nevertheless backing the overhaul led by chief executive Clo Moriarty, who has promised to take ‘a deep and honest look’ at the business. The average target price is 993p.
Currys, the electrical goods chain, has already delivered evidence of a turnaround. It is seeking to become a leading destination for televisions, smartphones and other technology gifts. Its shares have risen 14 per cent this year to 144p, while analysts expect them to reach 185p or even 210p.
Moving up: M&S shares, which have doubled over the past three years to 433p, continued their climb this week
Fashion forward
M&S shares, which have doubled over the past three years to 433p, extended their gains this week after the retailer reported better-than-expected half-year profits.
Machin insists, however, that the transformation is still in its early stages. Fashion, home and beauty are yet to match the performance of groceries, where growth is being supported by sophisticated use of retail media. Kathryn Turner, M&S’s food development director, features in Instagram and TikTok videos that have attracted such a large following that products appearing in them can quickly sell out.
Her M&S clothing choices also reflect the stylish, modern pieces now in demand at the refurbished Oxford Street Pantheon store, where sales have surged 30 per cent in two years.
Next, another of my retail investments, has gained 16 per cent this year to 15,485p. That may represent a premium valuation, but investors could choose far worse company for the festive season.
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