Undoubtedly, as inflation persists, consumers are trying to shop less in order to cut costs. For retail traders, this can mean that wallets experience a loss in value. However, not all retail sectors behave the same and cautious investors have the opportunity to find what they are looking for.
As consumers begin to focus on budgets, they are likely to turn to cheaper options for needed goods, giving stocks like Tesco (TSCOI) and Walmart (WMT) some downside protection.
One area that seems completely out of step with rising inflation is luxury retail, with companies like Louis Vuitton (MC) and Hermes (RMS) managing to maintain revenue growth thanks to the ability of their customers to continue to buy their products.
Tesco Price Chart (TSCOI)
Since the pandemic, consumer behavior has changed, with more and more people now preferring to shop online. Thus, stores that have a strong online presence may well be able to maintain revenue in times of inflation. A trend already observed with Amazon (AMZN) and Alibaba (BABA)
Investors should carefully study mid-range retail companies like Marks and Spencer (MKS) and Ted Baker (TED) as their products do not necessarily have inelastic demand.
Decrease of sales
With the cost of living constantly rising, it’s no surprise to see retail sales figures drop across the board. According to the Office of National Statistics, UK retail sales figures fell by 0.5% in May 2022. The three months to May also saw sales fall by 1.3% compared to 2021 .
It was a similar story in the United States, where retail sales figures fell 0.3% in May 2022, as reported by the US Census Bureau.
Danni Hewson, financial analyst at AJ Bell, told Capital.com: “Investors are wary even though many stocks look cheap and most will wait for the dust to settle before considering buying what looks like quite a steep drop.”
Exceptions
Even under these circumstances. Some pockets of the retail sector could do well in the coming months.
1. Low-Cost Necessities Stores
As consumer budgets get tighter, people are likely to buy the cheaper option of the same products. Low-cost consumer staples stocks such as Walmart (WMT) and Tesco (TSCOI) have already seen their valuations rise in the past week. Both companies continue to experience revenue growth.
Hewson agrees but adds a warning: “There are many examples of people ‘trading’ in an effort to save money and discounters stand to gain from this change, but these companies will need to be quick to keep prices low, which is expected to eat into margins.
She adds that some of the high risk businesses are those in the midrange: “The big risk is probably in the middle and stores like Ted Baker (TED), Marks and Spencer (MKS) and even Next (NXT) will have a fight on their hands. But the other two have a distinct advantage due to their mix of customers, brands, commodities, and hybrid setup. »
Walmart Pricing Chart (WMT)
2. Online retail
People’s shopping habits have definitely changed since the start of the pandemic in 2020, when e-commerce stores all saw an increase in revenue. Amazon (AMZN), Alibaba (BABA), and eBay (EBAY) all continue to increase revenue based on the latest earnings report.
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A consumer survey report by Deloitte reveals that people’s preference has changed. The report states that “Even in our recent back-to-school and holiday studies, consumers indicated that while they feel more comfortable returning to stores, their preference for online channels remains higher. than before the pandemic.”
The report also reveals that retail executives have also realized the importance of online presence, with 70% saying they plan to make major investments on digital marketing.
However, online stores should be careful as some recent emerging trends seem to show slowing growth. Online clothing retail stores ASOS (ASC) and Booboo (BOO) both recently announced that they were seeing higher numbers of product returns than before.
Hewson comments: “Online is all about finding a way to keep costs to a minimum, returns are a problem and staffing costs have become the number one headache for any business.
“Online seems to be a clear danger point as it has lost the edge it had when high street rents were extremely high, but if people can’t get out to enjoy the mix of retail and hospitality because they don’t have the money to spend on travel or parking, these businesses might find they get another lockdown as a boost”
Amazon Price Chart (AMZN)
3. Luxury
The rising cost of living does not affect all consumers in the same way. The behavior of luxury customers has remained unchanged during recent periods of inflation.
After suffering a drop in the number of sales in 2020, the sector has been resilient enough to pick up the pace. Research from Savills reveals that the rate of new store openings has recovered almost fully by 2021 to return to pre-pandemic levels.
The following luxury stocks all increased their earnings in 2021, to higher levels than in 2019:
- Louis Vuitton (TM)
- Hermes (RMS)
- Capri holdings (CPRI): the owners of Michael Kors
- Kering (KER): owners of Balenciaga, Bottega Veneta, Gucci, Alexander McQueen and Yves Saint Laurent
Hewson comments: “Luxury stocks have had a great start to the year and their outlook is quite encouraging as their consumption is simply not phased in by rising prices. Inflation doesn’t have much of an impact on the mega-rich, which means high-end brands can pass on price increases without losing sales. »
