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Stock picks for the retail sector, ahead of ‘Black Friday’

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‘Black Friday' - the US pre-Christmas shopping craze - will hit the UK this Friday. Ian Forrest, investment research analyst at The Share Centre, gives his views on the likely winners.

“In the UK, Black Friday has meant very little however, this year UK retailers such as John Lewis, Sainsbury’s, Asda and Halfords have jumped on board with the idea, in the hope of giving their pre-Christmas sales a huge boost.

“The high street enters its key trading period with consumer sentiment at its best level for many years, thanks to economic growth and rising employment. Internet trading operations are stealing a march on high street-only retail propositions and those retailers without an online presence are going to find it very challenging to compete. Super and hyper markets have also become a threat to some of the established high street brands, as they steal market share on product ranges such as clothing.

“Although many general retailers could see a distinct seasonal flurry over the festive period, sales have been under pressure in the last year. Annual revenues in the sector, reported in the 12 months to September, fell by 2.7% to £51.2bn on a headline basis. However, profits have fared better, with profits after tax climbing 23% over the same period to £2.8bn.

“The personal goods sector has outperformed general retailers at both the top and bottom line. Burberry and its sector cohorts have seen annual revenues in the same period climb by 12.8% to £3.9bn, as luxury goods sales benefit from a burgeoning Chinese middle-class. Furthermore, net profits are soaring, climbing 25.4% over the period.”

For investors looking for exposure to the sector, Forrest recommends Marks and Spencer, Burberry and Sports Direct:

“British retailer Marks and Spencer continues to look at ways to reduce costs whilst remaining competitive in these challenging economic conditions. The company provided investors with some comfort by keeping its full year guidance unchanged. Marks and Spencer’s health is crucial to the wider retailer sector, with the company accounting for one fifth of the sector’s revenues.

“We continue to believe that investors should hang on the coat tails of recovery at Marks and Spencer, as it tackles its problems in womenswear and general merchandise. Improving consumer confidence and recovering UK economy, led by domestic demand, should be supportive of future results.”

“Luxury brand Burberry said in its first half results that the impact of foreign exchange rates would fade after weighing on profit and sales during the period. Under the new CEO, the company has had a relatively smooth transition, revenues are up, there is good growth across its three main product categories and the digital side of the business is performing well in all regions.

“Burberry has changed its strategy, becoming less reliant on discounts at department stores in favour of fully priced merchandise; the idea being to improve the exclusivity of the Burberry brand. So far this seems to be step in the right direction as recent trading updates have shown, against a backdrop of a slow tentative global recovery. We recommend Burberry as a ‘buy’ for medium risk investors looking for capital growth.”

“Sports Direct’s share price has raced ahead over the past five years on the back of impressive sales and profit growth. We recommend the group as a ‘buy’ for investors as we become more confident in the improving economic outlook in the UK. The 2015 p/e ratio is currently 16 times earnings, which is toppy for a retailer.

“However, Sports Direct’s target of 10% to 15% earnings growth per annum by expanding overseas into higher margin premium segments looks achievable. Momentum and expansion should support the share price, but we recommend investors buy into the stock in stages by taking advantage of dips in the share price.”

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