Mercy Killing - UK Retail Sector

Although financial markets remain buoyant, the drip feed of good news in the retail is starting to wear thin. Literally Mergers & Acquisition rumours have kept the market somewhat attractive. The advice is don’t play the roulette table and start looking at alternatives. Three indicators indicate this reasoning:

1. Earnings Revisions

This is simply a scorecard when analysts revise their estimates for a particular stock. Aggregated on the entire retail sector the results are not good. The number of earnings revisions for UK retails has steadily been turning negative.

2. Profit Warnings

A critical leading indicator. In simplest terms it’s when a company announces that it will miss profit expectations. In April alone profit warnings are up 33% and this has been steadily increasing. Carpetright and Carphone Warehouse were the main culprits this month.

3. Yikes! Interest Rates and Disposable Income

The notion of higher interest rates is starting to affect consumer sentiment. The credit bubble is peaking and consequently we are on the verge of further deterioration in household disposable income. It’s only a matter of time before the housing market slows and as such, disposable income will wane. The retail market is seeing some of these effects already.



Retail Sector Comparables

‘Killing the sector softly’ – revisions continue turn sour

Recommendation

Valuation and fundamentals of the UK market remains an issue. Where is the breaking point? We feel it’s better to start getting of sectors that are clearly showing deterioration of its fundamentals. The retail sector is clearly one of them.jkhb

These views are independent of FactSet Europe Ltd and are proprietary to Bobby Rakhit. For the full report and individual sector reviews and recommendations please contact rakhitreport@yahoo.co.uk.