Black Friday. Cyber Monday. Thank-God-it’s-over Thursday. If you haven’t noticed that we’re in the middle of the now traditional pre-Christmas retail frenzy then you clearly enjoy a gloriously off-grid existence. Can I come and join you, please?
Black Friday is the most irritating American export since Hallowe’en and it is not just grumpy old men like me who think so. Stressed employees hate this chaotic trading period, which their employers treat as just another shopping day. Time and a half? Forget it.
Shareholders, too, are wising up to the fact that all that extra turnover is pointless if it simply brings forward low or no-margin sales that would have been achieved at full price a couple of weeks later in a more rational retail environment.
Even consumers are realising that there’s often less to the Black Friday sales than meets the eye. A study by Which? has found that 90pc of so-called “deals” are available at the same price or cheaper in the following six months. No surprise then that 40pc of British shoppers see Black Friday as an American tradition that we can do without.
From an investor’s point of view, the Black Friday madness is just what the retail sector does not need at the end of the high street’s annus horribilis. So far, 2018 has seen the demise of Toys R Us, Maplin and Poundland, the obliteration of profits at the nation’s favourite, John Lewis, and hundreds of store closures by the likes of M&S, House of Fraser and Debenhams. Slashing prices in this environment looks crazy, but economic self-harm seems to be the British way these days.
It is not just the price cuts that are devastating the retail sector’s profitability. Changing shopping habits and the shift of power to the consumer are playing their part too. It is estimated that returns of unwanted items will cost UK retailers £360m over the Black Friday weekend alone. My daughter will routinely buy multiple items, keep the one that fits her best and send the others back at no cost to her but a significant one to the retailer.
Apparently, half of all womenswear bought online is returned in this way. The proportion is lower in other markets like electronics but even here the cost to the retailer is meaningful. An electrical item that has been opened cannot be sold as “new”. The rational response to this would be to offset the real cost of returns with a charge to the consumer but no retailer would dare to levy that in today’s hyper-competitive market.
Anyone who reads this column regularly will know that I am becoming increasingly convinced that the bad news and uncertainty in the British economy is more than priced into a deeply out-of-favour market. The UK stock market looks like an interesting contrarian opportunity. I wonder, though, whether the high street is the exception to that optimistic outlook. Sometimes when you try to swim against the investment tide you’re washed up on the beach.
In practice, the fate of the retail sector is a bit more nuanced than this. The technological disruption led by Amazon will cut a swathe through the high street and many retailers will prove to be value traps for which no price is low enough. They will simply cease to exist and join the long list of shops that we are briefly misty-eyed about but don’t really miss that much. Those that can adapt to the new retail reality, however, can survive and some will thrive. It’s not as if we have stopped shopping, it’s just that we don’t want to do it in the way we used to.
At pivotal moments like these, traditional valuation measures become less useful than in more stable markets. Take Dixons Carphone’s shares, which you can buy for six times expected earnings while picking up a dividend yield of nearly 7pc. Are they better value than WH Smith’s, priced at 18 times earnings and yielding less than 3pc? Maybe they are, but perhaps you are better off paying three times as much for a business whose fast-growing travel arm is pretty much immune to the threat of the internet.
Maybe you’re even better off paying 50 times expected profits at online fashion retailer Asos. This is a business which has learned to live with the cost of today’s buy-and-return model and continues to see double-digit profit growth. It uses technology to build a size profile of its customers to help them get the right fit first time and reduce their propensity to send back too much stuff.
The retail sector offers a mixture of opportunities but also traps for the unwary. And the implications of the disruption of the high street do not end with the retailers themselves. Recent results from Landsec, the UK’s largest property developer, were marred by falling valuations in both its retail parks and shopping centres. It is looking to convert many of its suburban shopping sites into housing to counter the decline in bricks-and-mortar retailing, but the real indication of the challenge facing the high street is the fact that its stock market value is currently nearly 40pc lower than the notional value of the properties it owns. That’s the real Black Friday discount.