A rapidly-deteriorating outlook for the British retail sector makes me increasingly fearful of the earnings outlook over at Dixons Carphone (LSE: DC) and The Restaurant Group (LSE: RTN).
At face value my cautious take could be viewed as rather OTT, particularly given that headline retail data continues to show steady sales growth. Indeed, the latest gauge from the British Retail Consortium (BRC) released this week showed like-for-like revenues rising 1.9% in September, speeding up from the 0.4% rise punched in the same month in 2016.
However, the rise in monthly sales that we are still seeing can be attributed in large part to retailers having to pass higher costs onto the consumer. And with wages failing to keep pace with inflation, putting extra stress on already-high household debt levels, I remain convinced that retail sales in the UK are still on course to tumble.
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Sales getting slashed
This bodes extremely badly for sellers of expensive goods like Dixons Carphone. Demand for high-priced discretionary items like electricals is often the first to fall in times of falling shopper spending power and declining consumer confidence, and signs are that this is already beginning to transpire.
BRC chief executive Helen Dickinson said at the time of this week’s release: “From a consumer perspective, spending is still being focused towards essential purchases.” And she made particular reference to “consumers buying their winter coats and back to school items, but shying away from big ticket items such as furniture and delaying the renewal of key household electrical goods.”
Dixons Carphone’s share price dipped in August after it warned that the increasing price of mobile phones (caused by unfavourable currency fluctuations) was causing customers to hang onto their aged handsets. This problem is unlikely go away any time soon, even as Apple’s new model hits the stores, and could potentially spread to Dixons Carphone’s other product ranges.
City analysts are expecting the retailer to endure a 19% earnings fall in the year to April 2018, and I believe the threat of further painful profits reversals makes the share a risk too far right now.
So I would disregard Dixons Carphone’s ultra-low forward P/E ratio of 7 times, given that brokers could continue hacking down their earnings projections for the near term and beyond, and steer well clear until the tense economic and political backdrop begins to improve.
Another horror show
The same pressure on discretionary spend would also discourage me to stay away from The Restaurant Group.
The company’s share price flipped temporarily higher in late August after it advised of “early signs of improved volume momentum in our leisure business.” The company lauding the positive impact of price changes and menu improvements at Frankie & Benny’s.
The Restaurant Group remains confident that these measures, allied with the impact of broad cost-cutting across the group, should create a better earnings-generating machine in the years ahead. I’m afraid that I am not so optimistic given the intense competition in its marketplace, combined with faltering footfall at UK retail parks where the vast majority of its eateries are located.
The business is expected to swallow a 27% earnings drop in 2017, resulting in a prospective P/E ratio of 14 times. This is pretty high in my opinion given the hard work The Restaurant Group still has in front of it to get sales firing again.
