[ad_1]
Image source: Getty Images
Recession fears and a cost-of-living crisis led to a big sell-off in consumer discretionary stocks last year. However, the sector is one of the better performers this year due to improved economic prospects. So, I had to buy it FTSE retail stocks today?
No April Fool’s joke
The result of higher interest rates paired with higher prices usually does not bode well for the economy, as discretionary spending is the most important. But to the surprise of many, retail sales data has proven stronger than expected so far – growing in January and February and even beating consensus expectations.
Therefore, it is not surprising to see a new report from Next and Hennes & Mauritz (H&M) blew expectations out of the water. After all, the FTSE shows like Tesco and Related British food (ABF) has doubled this year on positive retail data.
Next showed a 5.7% rise in pre-tax profit to $879 million in the year to January on an 8.4% increase in sales. H&M reported an operating profit margin of 1.3%, up from 0.9% a year earlier.
In 2022, Next’s share price fell 35% with the stock market facing serious volatility and the business fighting high inflation and high shipping costs, but now it is expected that the retail sector will return in the first quarter of 2023, with Next up 11.85% in three months.
Harry Leyburn, Saxo
On that basis, should I buy FTSE retail shares during the rebound? Well, not necessarily. According to Leyburn, “However, the positive outlook for the sector is not a cause for celebration with businesses and consumers still facing the cost of living crisis”.
He didn’t say anything wrong either. Inflation is still hot, real wages continue to lag, and consumer confidence remains in the gutter. So, buying shares in this FTSE winner may involve some risk as it may drop in value.
In fact, another angle in the data is that showing positive sentiment may be overdone. That’s because the volume of sales in the three months to February actually decreased by 0.3%. Thus, more data are needed before such optimism can be justified.
Are these FTSE shares discounted?
All that said, it doesn’t stop me from buying retail stocks if they’re trading at a discount – and there are quite a few. For example, the classic FTSE is like Marks and Spencer and Sainsbury’s trading at a valuation multiple that is below the industry average.
| Metric | Next | ABF | Tesco | M&S | Sainsbury’s | Industry average |
|---|---|---|---|---|---|---|
| Price-to-sales ratio (P/S). | 1.6 | 0.9 | 0.3 | 0.3 | 0.2 | 0.3 |
| Price-to-Earnings (P/E) ratio. | 11.3 | 21.7 | 20.2 | 10.4 | 10.9 | 13.4 |
| Price-to-sales ratio (FP/S). | 1.6 | 0.8 | 0.3 | 0.3 | 0.2 | 0.5 |
| Price-to-earnings ratio (FP/E). | 13.0 | 15.7 | 14.0 | 11.0 | 14.3 | 13.1 |
And despite the current inflationary background, it is worth noting that inflation is forecast to drop to 2% by the end of the year. This should help the bottom line of these retailers. What’s more, running seems fast, which should also increase the top line.
For that reason, I am more bullish than bearish on the retail sector, as the initial headwinds start to turn into tailwinds. Thus, I would be looking to add more to my current M&S position and potentially explore other retail names for long-term gains.
[ad_2]
Source link