Investors snap up undervalued retail stocks following results

Valuations in the retail sector were the subject of renewed interest today after small-caps Halfords Group (LSE:HFD) and Wickes Group (LSE:WIX) impressed with their year-end trading performances.

Beneficiaries of the improved mood included JD Sports Fashion (LSE:JD.) and Marks & Spencer Group (LSE:MKS) in the FTSE 100, while Currys (LSE:CURY) and WH Smith (LSE:SMWH) fared well in the second tier.

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B&Q and Screwfix owner Kingfisher (LSE:KGF) was also lifted on the read-across from Wickes, which forecast 2024 profits towards the upper end of the City consensus range.

Highlights of the Wickes update included 14% sales growth for its TradePro operation as Retail division like-for-like sales accelerated 2.6% higher in the 26 weeks to 28 December. This compared with 0.6% in the first half.

Design and Installation orders returned to growth in the fourth quarter, although the underlying sales figure for the second half was 8.4% lower amid a tough backdrop for big-ticket purchases.

The shares rose 18.4p to 171.6p, taking the FTSE All-Share company back to where it was in the weeks before November downgrades linked to higher National Insurance contributions.

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Investec said a valuation multiple of 10.7 times forecast 2025 earnings prior to today’s update had looked undemanding given the company’s cyclical upside potential. The shares traded with a 7.1% yield based on hopes for an unchanged 2024 dividend of 10.9p.

The bank also highlighted Wickes’ strengthened market position and continued investment through the cycle, having opened four new stores and carried out seven refurbishments in 2024. About 80% of the estate is now in a new format.

As well as the guidance for pre-tax profits at the upper end of the £39.7 million to £44 million range, year-end cash levels were better-than-expected at £86.3 million.

Halfords beat Wickes to the top of the FTSE All-Share, rising by 21p to 147p after it forecast underlying pre-tax profits for 2024-25 of between £32 million and £37 million. This compared with City expectations of about £28.3 million.

The group said: “In recent months we have seen an improvement in trading alongside continued progress on a number of key initiatives, including our pricing and promotion strategies and cost reduction measures.”

Peel Hunt said the biggest surprise in the statement related to Christmas trading in cycling, with like-for-like sales up 13.1% in December.

While not getting carried away with its assumptions for the next financial year, the bank said the performance was reassuring. Demand for motoring products has also benefited from the recent cold weather, with sales up 5.5% in January.

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In the Autocentre division, like-for-like sales in the more profitable and strategically important Services, Maintenance and Repair market rose 10.3% in the third quarter. This has offset continued weakness in the consumer tyres market.

Other positives included lower-than-expected freight headwinds and cost savings that are likely to exceed the company’s previous £30 million target for the March financial year.

Changes to the minimum wage and national insurance contributions will add about £23 million to direct labour costs in 2026, with Halfords adding that it is much harder to predict how these Budget changes will impact demand and the health of the broader economy.

Peel Hunt, which has a price target of 200p, said: “The valuation is lowly and the shares were certainly not expecting an upgrade.

“There are still some headwinds but management has the business correctly configured to take advantage of better trading conditions.”