Robert Stephens, CFA, discusses the prospects for FTSE 250 consumer-focused stocks Marks & Spencer, Dunelm and Bellway.
The UK economy may gradually be reopening, but consumer confidence is at its lowest level since the depths of the financial crisis in 2009. Last month, it improved from a reading of minus 34 to minus 30, according to GfK.
However, with a zero-score representing neither a positive nor negative outlook among consumers, there could be a long way to go until consumer-focused businesses are back to normal.
Could this weak outlook provide buying opportunities among FTSE 250 consumer-focused businesses such as Marks & Spencer (LON:MKS), Bellway (LON:BWY) and Dunelm (LON:DNLM)? Or, should investors wait for greater certainty before buying them?
Marks & Spencer
In my view, the Marks & Spencer share price has heavily underperformed many of its sector peers in 2020 due to its lack of online exposure. Therefore, even though it has been allowed to remain open during lockdown, it has failed to benefit thus far from rising demand for grocery deliveries at a time when online grocery penetration has risen from 7% to 13%.
This is set to change in September, when Marks & Spencer’s partnership with online grocery delivery company Ocado commences. This will immediately provide Marks & Spencer with access to a fast-growing market that could catalyse its overall performance. Alongside its improving efficiency, this could encourage a recovery in its stock price following its 80% decline in the past five years.
Weak consumer confidence may cause further challenges for the company’s non-grocery prospects in the short run. However, its large-scale investment in online may prompt improving investor sentiment that pushes its shares higher as it catches up to multichannel sector peers.
While Marks & Spencer has previously failed to fully embrace online retailing, FTSE 250 home furnishings retailer Dunelm has thrived following major investment in its multichannel services. For instance, in the first half of the current financial year it reported a 33% rise in online like-for-like sales.
Undoubtedly, its second-half performance will have been hit by enforced store closures. Dunelm may also experience reduced demand for non-essential items as weak consumer confidence weighs on the sector. However, the implementation of its new online platform could allow it to capitalise on a shift from in-store retailing to online shopping that could be exaggerated by changing trends caused by lockdown measures.
Dunelm’s net debt position of £40 million and cost-cutting measures suggest it can overcome short-term risks to deliver long-term share price growth.
Housebuilders such as Bellway may find that weak consumer confidence, as well as rising unemployment, cause the pool of potential new homebuyers to shrink. Mortgage approvals have sunk by 90% since the start of the coronavirus pandemic, and a quick recovery may prove elusive.
Still, the fundamentals of the housing market remain sound. An extended period of low interest rates and government support schemes such as Help to Buy could combine to stimulate demand for new homes. A rising UK population may mean that the supply/demand imbalance driving house prices higher in previous years persists over the long term.
Bellway’s net debt position of £157 million and committed banking facilities of £545 million suggest that its finances are sound. Its share price fall of 35% since the start of the year could provide a long-term recovery opportunity for investors.