Life as a retailer operating in the UK has been challenging in recent years. Consumer confidence has been negative since the start of 2016, with higher inflation causing household disposable incomes to decline in real terms. Shoppers have become increasingly price conscious, and this has created a growth opportunity for budget retailers.
Alongside this, consumers are increasingly shopping online. This has caused many retailers to become less competitive, with their relatively high costs hurting their financial performance.
However, with the prospects for consumers having the potential to improve, and retailers adapting their growth strategies, there could be turnaround opportunities on offer.
In the last decade, UK consumer confidence has been weak. In fact, the GfK consumer confidence index has only been in positive territory in 2014 and 2015, as well as briefly at the start of 2016. At all other times it has been negative, with the current reading of minus 9 indicating that consumers have a bearish view on the future.
This is understandable, since Brexit is a matter of months away. With an agreement yet to be determined between the UK and EU, and there being obvious hurdles to overcome such as the Irish border question, a period of uncertainty is set to remain.
However, at the same time, there could be green shoots of recovery for UK retailers. Inflation has fallen to 2.4% and is forecast to decline to 2.2% by the end of the year. Next year, it is due to move to 2.1%. Over the same time period, wage growth in the UK is forecast to move above 3% and remain above that level through to 2020.
This may be significant because it could mean a period of positive real-terms growth in disposable incomes. While this may not thrust consumer confidence to positive levels overnight, it could equate to higher spending levels and a less price-conscious consumer. As a result, trading conditions for retailers may show signs of improvement.
Improving prospects could be good news for retailers such as Kingfisher (LON:KGF) and Marks & Spencer (LON:MKS). The UK remains a key market for both companies, with their financial performance suffering in recent years. For example, both stocks delivered a double-digit fall in EPS in their most recent financial years.
However, alongside the potential for an improving external environment, the two companies appear to be adopting solid growth strategies to boost their financial performance. For instance, Marks & Spencer is seeking to generate cost reductions of £350 million. It is seeking to further develop its online capabilities through a new website and higher investment in its supply chain. It is also closing less productive stores as it seeks to become more flexible and competitive.
Kingfisher, meanwhile, is in the third year of a five-year transformation plan. It is seeking to improve its digital capabilities as well as generate operational efficiencies. With double-digit EPS growth forecast in each of the next two years, it seems to have turnaround potential. Its PEG ratio of 0.6 indicates that it could offer good value for money ahead of the release of its trading update tomorrow. While potentially volatile in the near term, it could offer investment potential in what may prove to be an improving wider retail marketplace.
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