The massive gains retail stocks experienced during the pandemic were all lost last year as the cost-of-living crisis limited spending exponentially. Nonetheless, the retail industry could reverse its losses and go on a bull run this year. Hence, I’m looking for shares to buy, and these two stocks stand out to me.
Supply chain problems ease
Apart from sky-high inflation hurting consumers’ pockets, retail and e-commerce chains also had terrible inventory issues to deal with last year. Retailers over-ordered ahead of an economic slowdown and were left with a ton of inventory they couldn’t get rid off. Pair this with higher freight costs and it was no surprise to see a disaster for many firms’ bottom lines.
That said, the tide could be turning, according to Peter Garnry, Head of Equity Strategy at Saxo. The analyst cites three reasons why he’s bullish on the sector:
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- Container freight rates and supply chain delivery times have normalised. This improves profitability and customer satisfaction.
- Discretionary spending in Western households is much more robust despite inflation and lower real incomes. Consumer companies surprised on revenue growth in the latest earnings season.
- Cost cutting among e-commerce companies will significantly improve profitability this year. Online advertising prices have also come down.
Astonishing ASOS
Some of Garnry’s forecasts have proven to be true thus far, especially with ASOS (LSE:ASC), which provided a trading update last week. The stock dropped an eye-watering 72% last year due to excess inventory and a declining balance sheet.
However, the ASOS share price is now up 40% since the start of the year, boosted by a better-than-feared update. In the release, CEO José Calamonte laid out the group’s 12-month turnaround plan, which resonated strongly with shareholders.
- Improving inventory management.
- Simplifying and reducing costs.
- Building a robust and flexible balance sheet.
- Reinforcing management and refreshing the company’s culture.
These factors combined with the purging of excess stock and £300m worth of profit optimisation, could see the growth stock’s bottom line improve over time. After all, the board is expecting to see a return to profitability and positive free cash flow by the end of its financial year. As such, a further increase to its share price remains possible.
NEXT in line
Another share I’m eyeing to buy is NEXT (LSE:NXT). Like its peer, its stock dropped in 2022, declining 35%. But, it’s also staged a bit of a comeback this year after a stellar Q3 update that beat analysts’ estimates. The NEXT share price is now up 10% in 2023 alone.
Additionally, the conglomerate updated its FY23 profit guidance as it now anticipates profit before tax to come in £20m higher, at £860m.
Having said that, guidance for the following year took a hit as the FTSE 100 stalwart expects full price sales to fall 1.5% due to constrained discretionary spending. This would bring pre-tax profits down by 7.6% to about £795m. Even so, margins should improve as costs begin to taper off going into the spring and summer seasons.
Provided shipping costs continue to decline, the route to margin expansion remains possible, thus making NEXT shares lucrative for me. After all, the company is still proceeding with its share buyback programme, displaying confidence from insiders that a rally is possible from current levels.
