Retail sector is back in fashion

Fashion retailers had a poor summer. They normally shift lorry loads of shorts and sandals when the sun is out, but the joint-second warmest September since 1910 meant that sensible folk headed for the beach, not the high street. N Brown and Ted Baker have struggled, but the market clearly liked something in today's results and the shares are flying.

Total sales rose 1.3% in the five weeks to 1 October, according to the British Retail Consortium (BRC) and KPMG, a return to growth after a dip in August. On a three-month basis, however, sales rose 1%, only just ahead of the 12-month average of 0.9%, the worst average in the survey's 21-year history.

While consumer confidence has improved since the EU referendum in June, monthly retail spending remains volatile, says BRC chief executive Helen Dickinson, reflecting "longer- term economic headwinds as retailers begin to seek to mitigate the impact of higher import costs due to the fall in the value of the pound".

Recent data has been hard on the retail sector, and the big listed players have struggledNumbers were flattered by both the back-to-school rush and August bank holiday, but autumn collections of women's clothes and footwear failed to inspire.

Sales growth of non-food items remained "sluggish", said Dickinson, up just 0.5% over the past three months.

That's confirmed by latest data from Barclaycard revealing clothing sales fell 2% year-on-year last month. And it's in stark contrast to the BRC's 1.6% leap in food sales, the sector's best performance since November 2013.

Recent data from both the CBI and Office for National Statistics has been far from flattering for the retail sector, and the big listed players have struggled.

Since early September, the FTSE 350 General Retailers index has underperformed the FTSE All-Share by about 10%, with Next down 17%, almost completely unwinding recovery gains made since the post-EU referendum slump.

It's been the same for M&S, down 6%, and both N Brown and Ted Baker, down 19% and 12%, respectively. But something's changed Tuesday, and the sector is transformed from Cinderella in rags to belle of the ball.

Clearly, a further plunge in the value of the pound - down from over $1.23 to near $1.225 - has helped investor sentiment, and the FTSE 100 has just hit a record high at 7,129. And Barclays said Tuesday that investors "may be a bit too pessimistic about the prospects for consumer spending in the UK post-referendum".

That's a clear boon for domestically focused stocks in the UK.

Better than expected

It's especially helpful for those posting better-than-expected results. There was relief that N Brown's half-year figures contained no nasties, and the share price surged 19%, although that does only claw back losses made in the past month.

Revenue crept up 1% in the six months ended 27 August to £429 million, and adjusted pre-tax profit slumped 20% year-on-year to £31.6 million. The plus-size clothes retailer also held the interim dividend flat on last year, at 5.67p, implying confidence in future cash flows.

Boss Angela Spindler says the Autumn Winter season has started in line with plans, too, and is "comfortable" with current market expectations for the full year. Much will depend on the crucial Christmas period.

It's no bed of roses at Ted Baker, yet sales in the 28 weeks ended 13 August jumped over 14%Chris Millington at Numis Securities is unconvinced, however:

"With so many conflicting factors, we are somewhat surprised by the extent of the market reaction today, albeit trading on just 7.5x cal-17 [price/earnings multiple], and with a poor trading backdrop, the lack of downgrades alone would probably have been sufficient to drive a bounce.

"Indeed, despite cutting recommendations on a number of stocks last week as part of our more cautious sector outlook, we retained our 'neutral' stance on N Brown, largely due to its lowly rating."

Joe Spooner at broker Jefferies thinks Brown shares are worth 250p. But Millington reckons they should trade at a discount to the sector, which explains a price target of 200p, roughly the current market price.

It's no bed of roses at Ted Baker, either. Yet, sales in the 28 weeks ended 13 August jumped over 14% to £259 million, and £1.2 million of foreign exchange gains chipped in for a 20% surge in pre-tax profit to £21.5 million. The interim dividend goes up 12% to 14.8p.

"The company is trading at a 15% discount to its long term average PE and 11% below recent highs," says broker Liberum. "We view this as an attractive entry point. Maintain 'buy' and 3,100p target price."

Baker shares rose 5% Tuesday.

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