GAM: Five ways to find opportunities in battered retail stocks

GAM Investments' fund managers discuss key themes that enable investors to find opportunities in a disrupted sector.

1. Seek out retailers without legacy lease issues 

By Adrian Gosden, investment director, UK equities

A major structural shift is happening on the high street owing to a move towards internet shopping amid rising costs for physical retailers in the form of the minimum wage, big rents and business rates.

We believe that it will take government intervention (reversal of cost hikes) and local council action (town planning – parking) to ease the headwinds.

Still, some stores such as Shoe Zone have managed to defy the gloom on the high street by posting impressive like-for-like sales growth.

This is a rare example of retailer that is not burdened by a legacy store estate. With an average lease length of only two years it has the flexibility to react to market changes.

It also means cash flow is not weighed down by upward-only rent reviews, which has been the downfall of other retailers. This cashflow underpins the progressive dividend policy and recently announced special dividend.

2. Tap into the trend towards 'experiential luxury'

By Swetha Ramachandran, investment manager, luxury equities

Luxury companies have attempted to respond to declining footfall by doubling down on innovation to spark interest in their physical locations – most notably through leveraging pop-ups.

Chanel and Tiffany have not just deployed these short-term, novelty physical stores with a heavily curated selection of products as a marketing tool but also to boost profitability from tapping into the luxury consumers' growing thirst for newness as well as personalisation.

Collaborations between established luxury players and emerging brands have generated significant customer interest – the Louis Vuitton x Supreme collaboration saw queues overnight in many of its retail locations, reminiscent of Apple stores during the heyday of the iPhone.

The growing trend towards experiential luxury lends itself well to the rise of innovative concepts to capture the attention of newer luxury shoppers who embrace the role of narrative in luxury – likely boding well for the upcoming launch of the London branch of Prada's luxury bakery concept Marchesi 1824, to follow on from the success of its Milan location.

We cannot wait to see what the queues will look like.

3. Companies which have invested heavily in IT and logistics will present value opportunities

By Niall Gallagher, investment director, European equities

The vexing climate for retailers as a whole has meant potential winners from the structural shifts have been tarred with the same indiscriminate retail brush as the losers.

This has unfairly penalised farsighted companies that have invested heavily into IT and logistics capabilities to match their inventory seamlessly to meet the consumer wherever they are shopping – whether online or offline.

Inditex, best-known for its Zara brand, is one such example, with its integrated approach to stores – providing consumers with myriad choices – such as buying online, collecting in store and returning to store – all while still maintaining a mid-teens operating margin level in a sector that is barely breaking even.

Zalando, a pure-play online retailer, is currently future-proofing its business model by becoming a platform that can enable retailers to access their own stranded inventory, to service the platform's 26 million-strong customer base in a manner of their choosing.

What these two companies have in common is a problem of inventory – too much, too little, not the right kind or not in the right place.

Inditex's solution to this is to take a holistic view of its inventory and to mix an art-and-science approach to effectively match its offer with demand. This involves liaising with individual store managers who feed upwards their views on local fashion tastes/demand and top-down proprietary algorithms that allocate stock to stores.

4. Take advantage of the Indian retail boom

By Tim Love, investment director, EM equities

India's retail sector is on a faster roll than ever before, where rapid urbanisation and digitisation coupled with rising disposable incomes and lifestyle changes are a boost.

We believe the Indian retail sector is at an inflection point where organised retail and consumption are on a higher growth trajectory.

The Indian retail sector is highly fragmented with 97% of its business being run by unorganised retailers such as the traditional family run stores and corner stores, meaning the growth potential here is huge.

5. Omnichannel retailers should outperform

By Mark Hawtin, investment director, technology equities

It is no longer sufficient to purely be an online retailer. Five years ago companies were commanding a huge premium as fast growing, online retail brands.

Now, online is just another route to market – it is essential to have an omnichannel presence, which is why we have seen companies such as Amazon buying Whole Foods.

The combination of all the different channels to market makes a huge difference and we believe there is no reason to pay a significant premium for a pure online retailer, hence why companies like ASOS, which do not have an omnichannel strategy, have struggled recently.

We believe that retail stores are not just about bricks and mortar anymore – it is about the multiple ways in which you sell to consumers and it is very clearly shown that, if you have an omnichannel strategy, you tend to sell lots more products.