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Recession fears and the cost-of-living crisis led to a sell-off in consumer discretionary stocks last year. However, the sector has had one of the best results this year given the improving outlook for the economy. So should you buy FTSE retail stocks today?
Not an April Fool’s Joke
The result of higher interest rates coupled with elevated prices does not usually bode well for the economy, with discretionary spending bearing the brunt. But to the surprise of many, retail sales data has proven stronger than expected so far this year, rising in January and February and even beating consensus expectations.
So it wasn’t too surprising to see recent reports of Next and Hennes and Mauritz (H&M) exceeding expectations. After all, FTSE shares like Tesco and Associated British Foods (ABF) have seen double-digit gains this year with positive retail data.
Next showed an increase in pre-tax profit of 5.7% to $879 million in the year to January with an 8.4% increase in sales. H&M reported an operating profit margin of 1.3%, up from 0.9% a year earlier.
In 2022, Next’s stock price fell 35% with the stock market facing severe volatility and businesses battling sky-high inflation and high shipping costs, but the retail sector is now expected to make a strong recovery in the first quarter of 2023, with Below, 11.85% in three months.
harry leyburn, sax
On that basis, should you buy FTSE retail shares as they rally? Well, not necessarily. According to Leyburn, “However, the positive outlook for the sector is not cause for celebration at the moment, as both businesses and consumers still face a cost of living crisis.”
You’re not wrong to say that either. Inflation is still hot, real wages continue to lag, and consumer confidence remains rock bottom. As such, buying shares in these FTSE gainers could present some risks in that they could lose value.
In fact, another angle to the data is that it indicates that the positive sentiment may be overstated. That’s because sales volumes in the three months through February actually fell 0.3%. Therefore, more data is needed before such optimism can be truly applauded.
Are these FTSE shares discounted?
All of that said, it doesn’t stop me from buying retail stocks if they’re trading at a discount, and there are a couple. For example, FTSE classics like marks and spencer and Sainsbury’s They are trading at valuation multiples that are below the industry average.
| Metrics | Next | ABF | Tesco | MS | Sainsbury’s | industrial average |
|---|---|---|---|---|---|---|
| Price-Sales Ratio (P/S) | 1.6 | 0.9 | 0.3 | 0.3 | 0.2 | 0.3 |
| Price-Earnings Ratio (P/E) | 11.3 | 21.7 | 20.2 | 10.4 | 10.9 | 13.4 |
| Forward price-to-sales ratio (FP/S) | 1.6 | 0.8 | 0.3 | 0.3 | 0.2 | 0.5 |
| Forward price-earnings (FP/E) ratio | 13.0 | 15.7 | 14.0 | 11.0 | 14.3 | 13.1 |
And despite the current inflationary backdrop, it’s worth noting that inflation is expected to drop to around 2% by the end of the year. This should help the bottom line for these retailers. What’s more, footfall appears to be picking up, which should boost the top line as well.
For those reasons, I am more bullish than bearish in the retail sector, as the initial headwinds start to turn into tailwinds. Therefore, I will look to add more to my current M&S role and potentially explore other retail names to capitalize on the gains in the long term.
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