The retail stocks in need of festive cheer

A flurry of in-line Christmas trading updates should be enough to provide fuel for the re-rating of the cheap-looking retail sector, a City firm said today.

Several retailers including B&M European Value Retail SA (LSE:BME) and JD Sports Fashion (LSE:JD.) trade with price/earnings (P/E) multiples in the single digits, which Peel Hunt believes creates potential upside ahead of January's run of updates.

• Invest with ii: Top UK Shares | Free Regular Investing | Open an investment Account

It pointed out that while October and November trading conditions weren’t great for the sector, Black Friday week brought a step up in momentum.

And with muted forecasts in place for the festive season, it suspects that in-line Christmas updates should be greeted by investors with enthusiasm.

Consensus forecasts point to profit growth of 7% in both the 2024 and 2025 financial years, the latter kept in check by worries over the impact of higher wage costs in the Budget.

• Insider: director deals include this recovery play
• Should you own a share with a place in the sun?
• Currys: a firm with a potentially bright future in store

The bank said: “Steady is fine. We anticipate that after another challenging year, with more reasons to be cheerful in 2025, a steady Christmas securing about 7% profit growth will be more than welcome.”

Hitting numbers in January will be seen as a success, but Peel Hunt said the main candidates for upgrades appear to be Marks & Spencer Group (LSE:MKS) and Next (LSE:NXT) based on their trading momentum and AO World (LSE:AO.) and Victorian Plumbing Group (LSE:VIC) for their profit performance.

Next and Marks & Spencer shares have performed strongly this year but Peel Hunt sees further upside based on price targets of 11,000p and 450p respectively.

As well as M&S, it adds that Dr. Martens Ordinary Shares (LSE:DOCS), Watches of Switzerland Group (LSE:WOSG), Card Factory (LSE:CARD), DFS Furniture (LSE:DFS), JD Sports Fashion and Currys (LSE:CURY) and all forecast to deliver double-digit growth in earnings over 2025 as their recoveries take hold.

• ii view: M&S - a transformation and further growth
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• Why FTSE 250 is tipped to thrive in 2025

It said the sector’s valuation appears cheap on an average 11.4 times forecast 2025 earnings.

Within this, several are on single-digits including B&M European Value Retail at 8.7 times, JD Sports on 8.3 times and Wickes Group (LSE:WIX) on 9.9 times. M&S is only on 11.5 times despite a raft of recent upgrades.

Peel Hunt said: “Hitting numbers in January should be more than enough to provide fuel for  re-rating, with wider consumer recovery still a long way from being priced into forecasts or valuations, in our view.”

The optimism has been offset by today’s profit warning by Shoe Zone (LSE:SHOE), which described trading conditions as “very challenging”. It has 297 stores and about 2,250 staff across the UK.

The AIM-listed retailer said consumer confidence had weakened further since the Budget, while additional costs caused by increases in National Insurance and the National Living Wage have forced the closure of a number of stores that are no longer viable.

Initial expectations for profits of £10 million in the year to next September are now closer to £5 million, while it no longer plans to declare a dividend with annual results on 21 January. The shares slumped 58.5p to 80p, their lowest level in three years.