This year's Goodbody Sharetrack portfolio offers investors a diverse range of companies in the key product areas of the retail sector - clothing, electricals, food and health and beauty.
The retail sector in general underperformed last year with the FTSE General Retailing Index declining by almost 15 per cent. It struggled against the backdrop of a tough deflationary environment, the impact of discounters in the clothing market and the perceived threat of the Internet.
Thankfully, from an investor viewpoint, it appears that many of these concerns have been discounted by the market, allowing share prices in the retail sector to move ahead in 2001.
However, it is imperative that investors consider four factors when investing in companies in the retail sector:
the outlook in the economies to which retailers are exposed;
the dynamics of the product area;
the market position of the company in question;
its long-term strategy. Regarding the first, the easing in monetary policy in both the US and Britain since the start of 2001 should have a positive impact on consumer spending. However, it may take some months before this is reflected in corporate profits and therefore in the share prices of retailers.
The dynamics in the product area are another crucial factor. For example, Marks and Spencer has seen its profits before tax (and exceptionals) decline dramatically from £982 million sterling (€1,601 million) to £557 million since 1996 as the deflationary impact of the growth of value players such as Matalan and Tesco has put intense pressure on retailers in the middle market clothing area. Investors should evaluate the strategies retailers have employed to build up market share as a way of identifying the most successful plays in the retail sector.
For example, in the case of WalMart, it has continued to concentrate on the basics of the business such as low pricing, customer service and expense control in the face of ever increasing competition. Through this, it has delivered consistent like-for-like sales growth and cemented its position as one of the leading global retailers.
Investors may also want to focus on retailers that have established an e-tailing capacity to complement their existing business.
In summary, the outlook is positive, with reductions in interest rates in the major economies set to provide a boost to consumer confidence. Whether this feeds through in time for higher share prices during the Sharetrack competition is something investors need to weigh up. Investors should concentrate on the retailers that have strong market positions and a strong forward-looking corporate strategy.
Tom McCabe works as an equity analyst in Goodbody Stockbrokers
