What we like in the UK.

Selective consumer-exposed stocks

For the reasons outlined in my previous articles (click here), we think UK consumer confidence will continue to improve throughout 2024.  A conviction that the underlying health and resilience of the UK consumer was being underestimated was one of the core reasons for our holding in Marks & Spencer, whose stock appreciated by 122% in 2023. 

Long-standing retail sector veteran Archie Norman was appointed Chairman in 2017 and has been instrumental in overhauling both the management and reputation of M&S.  Turning around a retail behemoth is not straightforward, but in 2023 the rewards started to become more tangible. 

M&S delivered a series of profit forecast upgrades throughout the year as the business gained market share in both its Food and Clothing & Home divisions.  Crucially, we think this momentum can be maintained.  M&S still has plenty of self-help measures (store rotation; logistics improvements; 3^rd party brand sales) that should underpin profit progression.  While it does operate in a competitive environment, recent changes have, if anything, developed in M&S’ favour.

M&S’ Christmas updated demonstrated that the business has carried this strong momentum into 2024.  The share price reaction on the day of release would suggest some disappointment at the lack of further upgrades to profit expectations, but we think this is more indicative of conservative guidance than anything untoward.  Some of the changes that we expect to benefit consumer spending, like the management teams will want to see the net impact of this before letting forecasts move too far.

 

The importance of being selective

The first two weeks of the Christmas reporting season also highlighted the importance of being selective within the retail sector as while most companies reported robust trends, there are a few finding things more challenging. 

JD Sports, the sportswear retailer, saw its shares fall by over 20% in early January as it reported sales had been softer than anticipated in the last few months of 2023.  JD had been a beneficiary of the boom in athleisure spending during the pandemic, as their young core customer base in the UK and US found themselves awash with dispensable cash thanks to government support schemes but had little else to spend it on. 

Supply chain issues in the wake of the crisis also meant that inventory was scarce, benefiting the best operators (like JD) who were prioritised for stock deliveries from the branded manufacturers.  An easing of conditions throughout 2023, however, has led to a glut in tracksuits and trainers.  Retailers, particularly in the US, have been discounting heavily to work through this excess inventory over the Christmas period.  To make matters worse, JD bet heavily on the success of a £120 Nike Tech Fleece which has not proven as popular as expected.  With a relatively new management team, JD will likely have to rebuild investor confidence. 

 

We’re all…still…going on a summer holiday

Airlines, more than other companies, represent the ‘what have you done for me lately’ attitude of investors.  After a strong January, the stock of airlines like Easyjet and Jet2 drifted for much of 2023 even as both companies continued to show improving operational and financial performance.  One core reason?  Concerns about whether any improvement would be sustainable into 2024.  The signs so far are positive with airlines reporting strong demand for this summer’s holiday season and fares modestly ahead of the prior year. 

Another reason for apparent scepticism on the sector came from those analysts who insisted on drawing analogies between the outlook for US airlines and their European counterparts.  A series of disappointing updates from American carriers were apparently a precursor of what was coming on this side of the Atlantic.  

This makes no sense for a multitude of reasons.  At its most simple level, it’s difficult to see how Chad Hogan deciding to take fewer flights between Idaho and New Mexico has much connection with Jean McDonald and her family taking their annual flight from Glasgow to Malaga for some summer sun.  On a slightly more data-driven angle, it just ignores the significant difference in capacity expansion that both markets have seen since Covid.

There are hardly any reasons to be concerned that capacity is going to overwhelm the European market in the near-term.  Production problems at Boeing are already tempering the growth rate of Ryanair, one of the few carriers attempting to grow their fleet at a meaningful rate.  Issues with Pratt & Whitney’s GTF engines means that Wizz Air’s capacity will be reduced by 10% in the second half of its fiscal year.  It is more than conceivable that these supply-side issues have an impact beyond 2024.

With capacity constrained and a healthy consumer environment, the airline sector should continue to deliver a string of positive updates throughout the year.  Earnings don’t appear to have yet reached unsustainable levels – Easyjet’s consensus operating profit per passenger in FY24 is estimated to be £6.54 versus a 10-yr pre-Covid average of £6.51.  Despite shares having a strong start to the current year, low-cost carriers like Ryanair and Easyjet are still trading on single-digit forward PE multiples, a notable discount to long-term average ratings.  This suggests the market is anticipating an imminent downturn in prospects for the sector, an outcome we find unlikely.