Scottish Investment Trust : Shopping around – opportunities in retail

If you look at the share prices of conventional retailers today, you'd be forgiven for thinking that the high street is on its last legs. Meanwhile, the eye-watering valuation of Amazon's stock already reflects a very optimistic future, leaving little room for any disappointment. Amazon now trades on over 170 times 2018 earnings. In contrast, Marks & Spencer is on just 11 times and Gap 16 times.*

Does this gulf in valuations point to the extinction of the high street? We believe it's misguided to assume that online will be the only way to shop. Online transactions are here to stay, but investors shouldn't underestimate the staying power of shops.

Instead, the market's disdain for conventional retailers should be a buying signal for contrarian investors. Shopping is a major leisure activity for a great number of people - not just a necessity, but a social activity, even a hobby. The convenience of clicks can't compete with that.
Meanwhile, many bricks-and-mortar retailers are meeting the e-commerce challenge head on, by creating multi-channel offerings with mobile apps and 'click and collect'. Some are also adding other leisure services to their sites, increasing footfall and encouraging spending. And many have powerful brands that e-commerce has yet to rival. Gap and Marks & Spencer provide two good examples.

Although Gap has fallen from favour since its peak of popularity in the 1990s, a turnaround is underway. The company is refocusing on its popular Old Navy and Athleta brands, while reducing Gap branded stores and bringing products more quickly to market to capitalise on current trends. All of this should boost earnings and improve margins. So too should its drive to move away from a reliance on promotions - which has encouraged consumers only to buy when there's a sale on.
Marks & Spencer is also reducing promotions as part of its own turnaround plan. Revivals in its fortunes have been heralded before, but we believe that this time really is different. Led by veteran retailer Steve Rowe and turnaround specialist Archie Norman, the company is shedding excess stores, revitalising product lines and improving its pricing strategy. Its food division is still market-leading, and its investments in IT and infrastructure are creating a robust multi-channel offering.

We see these and many other retailers as 'ugly ducklings' - unloved shares that most investors shun. Although they have been under pressure from online competitors, they have considerable potential to defy the market's pessimistic expectations and turn their circumstances around. And while we wait for our ugly ducklings to become swans, most - like Gap and M&S - offer higher-than-average dividend yields. We believe that the depressed shares of high-street operators conceal compelling opportunities. Smart investors should look out for high street bargains.

Alasdair McKinnon

February 2018

* As at 2 February 2018.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.

Investment trusts are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this promotion should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.

This promotion is issued and approved by SIT Savings Limited, authorised and regulated by the Financial Conduct Authority.