The Retail Sector: An Investor’s Guide
The collapse of Arcadia Group and Debenhams have dominated the headlines this week, another dramatic example of the serious economic effects of COVID 19. But while corporate collapses might make for good headlines, investors with shares in UK retailers will no doubt have questions about whether their investments are sound ones. The answer requires a more detailed look at the facts and is more nuanced than you might expect.
A Tough Time for Retailers
For starters, it is inarguable that UK retailers have faced a difficult year. Non-essential retailers have faced two lockdowns which have left them unable to open their doors for nearly three and a half months this year. According to the ONS, retail sales dropped by over 18% in April alone and data from PwC showed a record level of shop closures during the first half of the year.
Promising Signs of Resilience
There is, however, some reason to be optimistic. Following the first lockdown, retail sales rebounded strongly, finishing October at 7.9% higher than they were in February. Commenters have noted that the industry is experiencing a ‘V-shaped recovery’ and was in fact the only part of the UK economy to have recovered in July (though this recovery was unevenly shared). All this suggests that the sector may be more robust than the headlines suggest, and this is reflected in FTSE 100 share prices in the retail sector, which have actually increased over the last few months.
An Increasing Shift to Online
Of particular interest is that this rebound in sales has largely been driven by online sales, which saw growth of 52.8% between February and October. The trend towards online retail is not a new one and people have been talking about the death of the high street since well before the pandemic started. It seems likely, however, that the pandemic has accelerated this trend and those with investments in retailers would be well advised to consider how well positioned they are to benefit from this trend.
To conclude, the picture is not quite as grim as it might first appear. While it has had a difficult year, retail has shown remarkable resilience in the face of this and retailers with a strong online presence may even be positioned to benefit. It is also important to remember that retail has historically been quick to rebound from a crisis. Even after the 2008-9 recession, which led to the high profile collapses of giants including Woolworths and Zavvi, the sector’s sales returned to growth by 2010.
As always, investors should avoid panic-selling during a crisis and take a long-term view, being mindful of the underlying fundamentals. A cautionary example of this are the 1.38 million retail investors who sold their shares at the height of the crisis, only for stock prices to largely rebound.