Last year was a terrible one for many UK retailers and their investors. Retail bellwether Next issued several poor trading updates and other companies soon followed suit, dragging the whole sector lower.
Overall in the past 12 months, the UK’s general retail sector has declined by 10.8%, and the only category that’s delivered a worse performance is telecoms, thanks to troubles at BT and Talktalk.
Marks & Spencer (LSE: MKS) and Sports Direct (LSE: SPD) bore the brunt of the retail selling last year with shares in the companies declining 23% and 52% respectively. The big question is, can these retailers stage a comeback over the next few weeks if UK retail sales data continues to show positive trends?
Heading in the right direction
At the beginning of 2017, Marks & Spencer reported a 5.9% increase in group sales for the 13 weeks to the end of 2016. Chief executive Steve Rowe said that low prices and increased choice at the group’s clothing and home division helped to improve performance in a challenging marketplace. Investors seem to like this news as, in the weeks following, the shares have gained 3%.
However, these gains will only continue if Marks can prove to investors that the group is heading in the right direction. UK retail sales figures will help convince investors that this is the case as following last year’s Brexit vote, investors have been keeping a keen eye on those numbers for the first sign of any slowdown in retail activity.
January’s retail sales figures have already disappointed, but in the run up to Christmas, retail sales boomed. So consumers could be just working off a Christmas spending hangover. It will be some weeks before we find out if the UK shopper has sprung back to life in February.
City analysts are expecting Marks to report a decline in earnings per share of 17% for the year ending 31 March and the shares trade at a forward P/E of 11.6 based on these figures. If the company surprises to the upside when it reports results, there could be a sudden upward correction in the share price.
Correcting mistakes
After falling 52% last year, shares in Sports Direct are off to a good start this year. The shares have added 9% as investors return to the company following last year’s scandals.
Sports Direct is yet to report trading figures for the Christmas period but peer JD Sports has already reported strong trading over the period, which bodes well for its rival.
Based on recent gains, it seems as if investors are already beginning to regain trust in Sports Direct and just like Marks, if UK retail trading figures show an improvement in consumer demand, it could attract further interest. The shares currently trade at a forward P/E of 19.4 as earnings per share are expected to plunge 56% this year. Due to this downbeat forecast, any slight improvement in trading could see the shares rapidly rebounding higher.
