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How to avoid investing in the next HMV or Blockbusters

Joanna Faith
Written By:
Joanna Faith
Posted:
Updated:
18/01/2013

Doom and gloom surround UK retailers but investment opportunities still exist.

It’s been a depressing start to the year for UK retailers with yet more high street names collapsing into administration this week.

HMV and Blockbusters were the latest casualties, riding on the coattails of Comet and Jessops which also shut for business in recent weeks.

With continuing talk of a triple-dip recession and the next victim no doubt waiting in the wings, nervous investors can’t be blamed for wanting to rule out Britain’s retail names from their portfolios altogether.

However, when sentiment is poor it usually creates investment opportunities so while this may be the seemingly ‘safe’ option, by doing so they could be missing out on potential winners.

In fact some of the UK’s major retailers posted better than expected results this week after Christmas numbers beat gloomy forecasts.

Dixons Retail, owner of Currys and PC world, said it had a robust festive period with sales up 7% on the previous year, while Argos owner Home Retail reported a 2.7% rise in store sales.

Meanwhile, grocery retailers Tesco and J Sainsbury also announced positive Christmas sales.

So, it is clear there are still opportunities for investors out there. The question is how to spot them.

Stuart Welch, CEO of TD Direct Investing, says one place high street retailers have a natural advantage is where they sell products that consumers prefer to touch or try before they buy, such as fresh food or clothing.

He says: “It is no coincidence that the most recent high street casualties – HMV, Jessops and Blockbusters – are retailers who offer products that can just as easily be bought or downloaded over the internet. In the case of Jessops and Blockbusters, their products are now just as readily available in people’s homes thanks to advances in technology.”

Welch says investors need to consider how the retailer is using its own natural advantage to maintain a high street presence.

He says: “Does it offer something that is unique, that may not be easily replicated online? And if it doesn’t, how is it adapting its business model to stay ahead of the game?”

Patrick Connolly, certified financial planner at AWD Chase de Vere, agrees the best-placed retailers have a strong brand and either a good online presence or are able to compete with online competitors.

However, he says it is incredibly difficult to pick the potential winners from the losers.

“The best approach for investors is to get exposure through diversified investment funds rather than trying to pick individual stocks themselves.”

Meanwhile, Juliet Schooling Latter, head of research at Chelsea Financial Services, warns investors to tread carefully, especially if the bad weather continues.

She says: “The high street is certainly challenged and I think you need to be careful of retailers and pick the strong brands with strong balance sheets, importantly with minimal debt.

“The cold weather won’t help in the immediate future either. Next is one of the exceptions that seems to be doing reasonably well.

“The prolonged flat-lining of the economy, difficulty in refinancing, the major squeeze on the consumer pocket, and the rise of internet shopping has meant that some companies just can’t carry on indefinitely.

“It is a real shame and the number of empty shops on the High Street is increasing. How it will look in another three years is anybody’s guess, but it’s likely it will have to be more than just shops and become a ‘destination’ of some sort.”