A sell-off affecting some of the UK’s largest retailers has extended into a second day, after an analyst warned the spectre of higher taxes in the Autumn Budget, a softening labour market and sticky inflation will dent consumers’ spending habits.
Shares in AB Foods, Wickes and B&Q-owner Kingfisher all shed between one and 1.5 per cent on Wednesday morning, meaning all three firms have now seen at least five per cent wiped off their valuation since the start of the week.
Along with high-street darling Next, the trio of retailers were included by Deutsche Bank (DB) analyst Adam Cochrane in a group of ‘least preferred’ retail stocks on fears they are worst-placed to weather dwindling consumer spending power amid a tricky macroeconomic backdrop.
“We see a combination of more pressure on the consumer, cyclical downside in the category
which provides increased earnings risks and valuations which do not adequately reflect this,” Cochrane wrote in a wide-ranging note that also revealed stark findings from DB’s latest ‘Fear Index’.
The bank’s proprietary gauge of consumer sentiment found Brits across all income categories to be more fearful now than over the historical average since mid-2019 and more pessimistic than at any point since the pandemic.
Bleak outlook ahead
This negative sentiment is likely to worsen further over the coming months, analysts said, as inflation pressures persist and real wage growth slows.
Several months of speculation over which taxes will rise in at the Autumn Budget – expected in November – will also have a “negative impact on spending” they wrote, particularly among higher earners who are “more sensitive to the news cycle”.
DB also argued the budgets of lower income households will be stretched more than they already are if predictions that inflation will remain sticky for much of the rest of the year come to pass.
“We expect rising inflation to have an outsized impact on the already stretched spending power of lower income cohorts,” Cochrane wrote.
Listed retailers’ have shed more than £1bn off their collective market capitalisation since the note was published on Tuesday morning. It singled Marks and Spencer, Tesco and discount retailer B&M as being among the best-placed to navigate the deteriorating outlook and the “weaker UK consumer”.
Supermarkets and grocers’ “more defensive food exposure” generally puts them in a position to shoulder the higher food prices expected throughout this year, Cochrane wrote, while M&S’s customer base is likely to be more immune to inflation.
Costs up, demand down
Of the four firms bucketed into DB’s ‘least preferred’ retailers, Next was the only retailer to avoid a sharp fall in its stock price.
Shares in the Lord Wolfson-run clothing purveyor, which boasts a stellar track record at beating investors’ expectations, have remained flat this week, despite the bank raising fears the “star performer” was valued too highly after it announced string of earnings upgrades.
The note’s other ‘least preferred’ firms were less resilient, with Wickes shouldering the most aggressive sell-off. Shares DIY chain were down over seven per cent since market open on Tuesday, while Kingfisher was down north of five per cent.
The DB note’s central argument was also validated by a fresh CBI survey of the sector found sales in August to have fallen for the 11th consecutive month.
The closely followed poll warned that a toxic combination of weakening consumer demand and higher labour costs were combining to extinguish positive sentiment and put pressure on retailers’ margins.