Profound changes to retail outlook sparks unlikely share picks for Morgan Stanley

Retail sector analysts at Morgan Stanley say long-term shifts in consumer spending patterns sparked by the coronavirus crisis are “so profound that it will render irrelevant most of the research we have ever written”.

This week's suggested lifting of lockdown measures does not represent the beginning of the end of the pandemics impact on the sector, the analysts said they now forecast a 62% decline in sector earnings for 2020, with earnings next year expected to be down 33% too.

To pick out which companies are best placed, the new focus is now on balance sheet strength for each retailer as well as “how it will be impacted by ongoing social distancing measures, how cyclical it is, how deep the recession is going to be and how consumer behaviour changes longer term”.

As such, the investment bank's top picks in the sector now include B&Q owner Kingfisher PLC (LON:KGF) and Marks & Spencer Group PLC (LON:MKS), two names that would have seemed unlikely top picks in most recent years but both were upgraded from equal weight to overweight, where they join fellow top pick Associated British Foods PLC (LON:ABF), the operator of the Primark chain.

Based on current base-case financial forecasts, the biggest share price upside is seen at Dixons Carphone PLC (LON:DC.) and Superdry PLC (LON:SDRY) but they were both downgraded to equal weight from overweight, while the analysts left both Boohoo Group PLC (LON:BOO) and Dunelm Group plc (LON:DNLM) at underweight as they “look most overvalued”.

This group of four “could get into financial difficulties in a scenario in which there are is a second lockdown over Christmas, no vaccine was available until summer 2022, and very high unemployment until then”.

The contrast is offered by Kingfisher, M&S and AB Foods: “Although theRead More – Source

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