How attractive are high street value retailers?

Value retailers are becoming more attractive to potential investors as they continue to thrive during tough economic climes as cash-strapped customers seek out bargains, according to a report by Shore Capital.

At the end of 2011 value retailers operated from 16m sq. ft. and this space is continuing to grow. With the discount and value channel worth £5bn in 2011 and set to expand to £8bn 2014/15, there is plenty of growth potential, making this channel amongst the fastest growing segment of the market alongside online and convenience.

The demise of Woolworths has created a gap in the market, however value retailers must continue to tackle the threat of inflation in managing prices.

TJ Morris, which trades under the Home Bargains fascia, came top of the profits table, expected to deliver a forecasted £70.9m at a pre-tax level for 2012, trading from 250 stores. And there is more to come as Shore Capital describes the company as “highly immature”.

It said: “The stores are the epitome of good retailing to us; simple, well stocked and busy.”

Conversely, the largest value retailer, 350 store Wilkinson is not translating space into sales, although it remains profitable at pre-tax with £22.74m.

Shore Capital said: “Wilkinson remains a profitable, robust and successful family business; the sort of venture that the UK economy needs. However, within the high street value retailer subset its relative maturity and declining operating metrics leave the group lagging in some respects – so whilst Wilkinson is the largest, it is not ‘the daddy’.”

Among the single price retailers Poundland is the stand-out winner with a £26.8m pre-tax profit forecast in the current financial year. The analyst believes the retailer has the potential to nearly double its 340 store estate which makes it a leader in the value sector.

Alongside Poundland and TJ Morris, B&M Bargains is the third stand-out prospect in the sector. With a pre-tax profit of £60.94m forecast for the current financial year, B&M Bargains is one to watch and one that could carry “significant” buyer interest due to its “robust” net cash according to the analyst.

Poundworld’s forecast £7m pre-tax profit for this year and 200 stores has meant the retailer has “sustained robust growth but from a still modest base” and observers will be interested to see whether this momentum continues. Shore Capital said: “Sustained store development and rising margins may yet prove to be the rewarding exit for the owners.”

Family-owned 99p Stores generated a £7.17m pre-tax profit in its last update trading from 174 stores and is reported to be up for sale as DC Advisory was brought in to explore strategic opportunities. Again, there is massive growth potential and the retailer has 600 UK stores in its sights.


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