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XMAS AHEAD….Niche players only please

Broad credit/ earnings factors suggest a decent Xmas ahead

Anyone looking for pointers on Xmas would be reassured by recent data:-

a) The Visa Index found spending growth rose to a 3 month high in October up 2.1%. The beneficiaries it claimed were hotels, bars and restaurants.

b) Barclaycard data showed credit spending up 4.1% in the year with “non-essential spending up 10% to 6.6% whilst “essential spending” fell 3.1%. This was due to supermarket price wars and price falls for food/ household goods.

c)UK earnings growth was 3% to August 2015.

d) Gains in UK property help the “feel good” factor. The Halifax house price index said UK year on year growth was 9.7% in the 3 months to end October 2015.

e)The ongoing weakness in global crude oil prices has led to declines in UK petroleum / gas heating prices, amounting to cash savings for UK consumers. Weak crude is thought to have added around 0.5% to UK GDP.

Heading into 2016 the uncertainties of recent years are easing. There has been considerable growth in travel/ leisure spending and online (often spending areas linked to the Millennials generation). The internet has proved a disruptive technology for many retailers, as it requires upfront investment, goods delivery and hence is often lower margin than shoppers coming through doors.

Whilst there are longer term issues, concerning pension adequacy and the increasing need for UK parents to fund adult children, the willingness of the Bank of England to keep interest rates low has created a significant incentive for UK homeowners to deleverage (this works well in an environment of low mortgage rates).

The weather is a major factor during Xmas

Significant ink has been spilled predicting Xmas beneficiaries, and part of the answer depends on the weather. According to The Weather Co, a temperature of 1°C +/- leads to a 1% change in sales. In the £300bn UK retail sector this equates to a gain/ loss of £3bn. Last autumn was 1.5°C warmer than usual reduced demand for clothing/ footwear (13% of UK retail sales). Cold/ extreme weather reduces consumer mobility/ increases drinks consumption benefitting primarily the global players (SAB/ InBev/ LVMH).

Industry Warm winter

( Δ demand)

Cold Winter

( Δ demand)

“Extreme”

( Δ demand)

Sector Comment
Beverage Negative Positive Positive Global co’s
Hoteliers Positive Neutral Negative Global co’s
Restaurants Positive Negative Negative Expensive
Retail Shopping Positive Negative Negative Competitive
Online Neutral Positive Positive High growth
Publicans Positive Neutral Negative Recent profit warnings

Source: CSS Investments Ltd

The major retailers are engaged in a price war with periods of high/low intensity. ASDA has announced price cuts worth £26m in the run-up to Xmas but will scale back the “Black Friday” sales day on the 27th November. In 2014 many retailers saw sales slump in the run-up to Xmas as shoppers had bought their gifts cheaply on Black Friday i.e. too early. We think the major retailers are likely to be “dead money” in the current environment of market share loss by the majors/ gains by discount chains. We are minded to look at “niche” retailers in this environment.

AO World….. BUY

AO World floated on the Official List of the LSE in February 2014 at 285p per share. The company was set up to offer an online delivery alternative for the UK domestic appliance industry (sales of £3.2bn with ancillary services of £400m according to the OC&C Report). At IPO the AO had own website annual sales of £198m, third party branded website sales of £61.7m and logistics services of £15.7m. Since IPO AO World has expanded in Germany investing in distribution and logistics capabilities. The shares were aggressively priced at IPO – maiden net profits are expected in H2 2016 when AO will be through its start-up expenses.

Company AO World
 Share Price (p) 159
Target Price (p) 250
52 Wk Hi/Low (p) 330/119
Shares O/S 421m
Market Cap £672m
Avg Daily Volume 40k
Dividend Yield 0%

Source; Fidessa plc

Key Risks to Price Target

i) German expansion has brought risks in funding trading losses in Germany and start-up costs

ii) Competitive conditions likely to persist in the online market for white goods as traditional retailers improve their online presence.

iii) AO World valuation assumes significant profit growth in 2016 and 2017.

Topps Tiles….. BUY

Topps Tiles was formed via a merger with Tile Kingdom in 1990 growing its store portfolio from 40 to 346 presently – the co has strong margins and EPS growth during its expansion. Recently Topps has embarked on a smaller Boutique store trial (12-13 planned by end 2015). There was impressive growth during H1; with revenues growing 6.4% to £104m and pre-tax profit +15.4% to £9.1m – in addition net debt declined to £31m from £36.3m (2014). The Topps Tiles business is growing market share (30.3% v 28.5%) after adding 10 stores during the period. The board have demonstrated excellent inventory management and margin management, with both strong online presence and well positioned shop estate.

 

Company Topps Tiles
 Share Price (p) 139
Target Price (p) 200
52 Wk Hi/Low (p) 165/101
Shares O/S 193.6m
Market Capitalisation £269m
Avg Daily Volume 363k
Dividend Yield 1.67%

Source; Fidessa plc

Key Risks to Price Target

i) Topps Tiles shares are tightly held by major institutions hence can experience periods of lower liquidity and higher bid/offer spreads.

ii) Sensitive to price trends in floor coverings, arrival of stone effect porcelain and natural stone.

iii) Topps Tiles is sensitive to property market factors outside its control such as house completions, the pace of new builds, residential construction and changes in interest rates.

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