Fears over price hike squeezes on spending have hit the markets. With pressure on companies to reduce costs to compensate for the increasing expenditure caused by high commodities prices and the weakness in the pound it is not difficult to speculate on a double whammy on discretionary expenditure.
This is cutting into share prices of the big high street chains as non-food retailers take it on the chin. It is not hard to speculate on some very tough times ahead across the retail sector with the possibility that some of the more highly geared members going to the wall.
Long term share based Investors and short term spread betting investors will be looking to focus on those whose underlying costs are below the norm and the biggest differential must be on the ownership of the actual retail outlets themselves. Retailers such as Marks and Spencer, Tesco and Sainsbury are all holders of not just the deeds on much of their existing floor space but also have substantial land banks besides. Internal accounting procedures obviously charge between units but the overall position is one of strength not weakness.
This was one of the major arguments against Sainsbury splitting away their property into a separate vehicle as such a move would have left the actual retail arm in a difficult situation in their never ending competition with Tesco.
P/E expectations of many high street names make little recognition of the underlying strength of one business model versus another, as in times of growth both variations work just as well with the short term leasing based model having a slight cost advantage. In times of dearth, the tables turn.
Another area to watch out for is those companies with / without high borrowing requirements. Libor rates are now very wide compared to base rates but this of course hides a great deal.
The lending rates are fixed by the bigger financial institutions who have been busily rebuilding their capital bases over the past four months. Smaller financial units have not been able to do this and their borrowing rates are, in many cases, a percent, or more, higher than the official Libor rate. Many are struggling to get funding at any price.
As Simon Denom of Capital Spreads recently said “Investors would be wise to look across the investment landscape to check out which companies have large borrowing requirements. With margins being squeezed on four fronts, higher input costs (energy, commodities etc), weakening consumer demand (average UK income actually fell last year), higher corporate tax take (this budget is expected to be less than friendly) and finally higher refunding costs mean that the prospects for 2008 returns has never looked so grim”.
'Spread Bets on Retail Sector Shares', Feature by D. Jones, last update: 16-Oct-08
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