Proactive Investors - The outlook for the retail sector has gone from “less bad” to “quite good” according to Numis, with Frasers and Dunelm favoured by the analysts.
The investment bank said that the sector has rallied by over 40% from its recent lows, outperforming the wider market by 20%.
Fears which clouded the sector have been unfounded, with the backdrop improving, it said.
Discretionary spending looks set to be roughly 5% higher than previously expected and is on course to improve throughout the year.
This is largely due to incomes becoming stronger, energy costs falling and interest rate expectations moderating.
On the company side, while earning expectations have fallen roughly 15% over the last 12 months, much of the caution has been misplaced as supply chains are being managed cautiously and direct cost headwinds begin to ease.
Numis said that it has more upside on consensus forecasts than usual, and any downside estimates reflect challenged models as opposed to macro conditions.
Online retailers look set to be the most supported by a reduction in input costs which should help margins, potentially good news for the likes of ASOS and boohoo, both of which have endured a tough time post pandemic.
With that being said, analysts at Numis see good value in the omnichannel sector which it said is a market share-winning format, with Dunelm and Frasers favoured.
Despite its positive outlook on retail, it isn’t a case of ‘all boats rise.’
Numis expects some retailers are still at risk as competitive dynamics return, putting pressure on the market share of some companies.
Specifically, the group is negative on Kingfisher and cautious on Currys, while it takes a neutral stance on B&M, M&S and Next.