Morgan Stanley downgrades Dixons and Superdry, forecasts 62% slide in sector earnings
Morgan Stanley has re-rated a swathe of retailers, warning that earnings are likely to tumble this year and the next as long-term consumer spending patterns undergo a fundamental shift.
Associated British Foods
2,749.00p
14:00 23/04/24
Boohoo Group
34.38p
13:59 23/04/24
Cboe Brexit High 50
9,734.79
14:10 23/04/24
Cboe Europe All Companies
51.51
11:45 01/12/20
Cboe Europe Consumer Cyclicals Sector
29,187.19
11:45 01/12/20
Cboe UK 100
802.42
14:10 23/04/24
Cboe UK 100 NTR
867.69
14:10 23/04/24
Cboe UK 350
14,125.98
14:10 23/04/24
Cboe UK 350 NTR
22,763.15
14:10 23/04/24
Cboe UK All Companies
14,010.37
14:10 23/04/24
Cboe UK All Companies NTR
23,230.28
14:10 23/04/24
Cboe UK Consumer Cyclicals Sector
11,582.88
14:10 23/04/24
Cboe UK Consumer Cyclicals Sector NTR
17,173.16
14:10 23/04/24
Currys
62.40p
13:44 23/04/24
Dunelm Group
969.50p
13:49 23/04/24
Food Producers & Processors
8,223.31
13:59 23/04/24
FTSE 100
8,037.85
14:00 23/04/24
FTSE 250
19,698.56
14:00 23/04/24
FTSE 350
4,417.87
14:00 23/04/24
FTSE AIM 100
3,637.18
14:00 23/04/24
FTSE AIM All-Share
753.19
14:00 23/04/24
FTSE All-Share
4,372.25
14:00 23/04/24
FTSE Small Cap
6,432.58
14:00 23/04/24
General Retailers
3,906.74
13:59 23/04/24
Global Fashion Grp Eo-,01
€0.24
13:09 23/04/24
Kingfisher
250.80p
14:09 23/04/24
Marks & Spencer Group
261.50p
14:00 23/04/24
Personal Goods
16,218.33
13:59 23/04/24
Superdry
8.00p
13:54 23/04/24
In a sector note, the bank said the easing of lockdown measures did not represent the beginning of the end of the pandemic’s impact on European retail.
Instead it argued: “We expect social distancing measures, of varying degrees of severity, to continue until a vaccine has become widely available, hopefully in summer 2021. But changes to consumers’ lifestyles, and thus their spending behaviour, are likely to last much longer. And the retailers we cover will generally emerge with weaker balance sheets and ill-configured store portfolios.”
It also warned that the impact of Covid-19 on the sector was likely to be “so profound that it will render irrelevant most of the research we have ever written”.
Morgan Stanley is forecasting a 62% decline in sector earnings for 2020, and a 33% fall in 2021. The bank’s investment criteria for the sector have also shifted, with the focus now on “the strength of the balance sheet, how it will be impacted by ongoing social distancing measures, how cyclical it is, how deep the recession is going to be and how consumer behaviour changes longer term.
“Assessing retailers against these criteria is likely to dominate the investment debate for years to come, in our view.”
Based on the new criteria, Morgan Stanley named Primark-owner Associated British Foods, B&Q parent Kingfisher and Marks & Spencer its top picks, upgrading the latter two to ‘overweight’ from ‘equal weight’ and retaining AB Foods’ rating at ‘overweight’.
“Although they offer less base-case upside than these other names, they are less levered and, thus, we believe, offer less downside risk if the operating environment proves to be tougher than we envisage in our base case,” the bank said.
It left both Boohoo Group and Dunelm Group at ‘underweight’, arguing that they “look most overvalued”, and downgraded Dixons Carphone, Superdry and international online retailer Global Fashion Group to ‘equal weight’ from ‘overweight’.
Morgan Stanley said that its base-case modelling suggested the three stocks offered the most share price upside. But it added: “Our bear-case modelling suggests that all five could get into a financial difficulties in a scenario in which there are is a second lockdown over Christmas, no vaccine was available until summer 2022, and very high unemployment until then.”
The bank added a caveat to its research, however. “The Covid-19 crisis is fast moving and multi-dimensional, and we are not claiming to have many, let alone all, of the answers. We have never had less conviction that we do currently.”