UK Retailers – looking for bargains during the summer sales

One section of the European high yield market that has materially under-performed this year is the UK retailer and food producer complex. The rationale is fairly easy to explain: these companies are being squeezed by cost input inflation on one side (cotton, grain, cheese, sofas, whatever it is, it’s more expensive to source) and on the other side, the end customer (the UK consumer) has less money to spend. Result – your sales and profitability suffer and the company’s ability to service its debts deteriorates. The increased credit risk is reflected in higher bond yields. Add to this the fun and games surrounding the European sovereign crisis and it’s easy to see why these names have suffered from the “sell first, ask questions later” knee jerk response of the market when risk appetite wanes.

As I was reclining on my DFS sofa the other day it struck me that these mini non-discriminatory sell-offs often create opportunities. Any good high yield fund manager should always be looking for a bargain, whether he/she is buying a new suit in Matalan or looking to deploy capital in the credit markets. So one question we are grappling with at the moment is this: amongst the beaten up high yield UK retailers and food producers, are there any good deals to be had?

In my view, the answer lies in good old fashioned credit analysis. Looking at each company’s business model. Asking questions like “is this business model viable?” and “are there long term structural issues in the age of online shopping?” Analysing what is driving the top line, what is happening to costs, and crucially for any credit investor, looking at cash flow in this challenging environment and how resilient this cash flow is likely to be in relation to the company’s debt.

If we can find a company that can weather the current storm on the UK high street with its capital structure intact and buy some of their bonds at double digit yields, then this could be a great opportunity.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Discuss Article

  1. yellow says:

    HMV?

    Posted on: 12/07/11 | 9:20 pm
  2. Gareth says:

    Nominal retail spending has grown pretty strongly this year (+4.6% Apr 10 to Apr 11; May weaker), it’s not exactly true that consumers have “less money to spend”.

    Posted on: 15/07/11 | 9:40 pm
  3. Lardy-daa says:

    The cost of a basket of goods in the supermarket may be rising but I’d suggest the weight is decreasing.  Anyone noticed that bottles of Stella in Sainsbury’s are now 284ml rather than 330ml – same price as before though. Outrage! Wife’s happier though for some reason.  Similarly, “Taste the Difference” (I can) back bacon packs now contain six rashers rather than eight.  Again, same price as before. Sneaky little blighters!  Now, this sort of consumer trickery has always gone on but it is definitely on the up and up lately.  That could go some way to protecting food and drinks producers’ margins perhaps? Doubt they’re trading on double-digit yields though. And any fashion retailers are going to struggle to sell (many) jeans with just one leg.
    I’m guessing my opening sentence is flawed by the way, because the RPI basket is calculated on cost per weight measures? If not grocery prices may be contained going forwards. And we’ll all be healthier – the cost constrained, bacon eating, beer swilling amongst us at least.  Cheers!

    Posted on: 27/07/11 | 11:07 am

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