Clothes giant Next PLC (LON:NXT) and home furnishings chain Dunelm Group plc (LON:DNLM) were among the retailers downgraded to ‘sell’ by analysts at Citi as the bank warned that a recent rebound in the share prices of UK retailers was underestimating “lower fundamental demand”.
In a note on Wednesday, Citi’s analysts said the rebound was based on “shorter-term impacts” such as store reopening and potential cuts to VAT, which had served to mask lower demand as British households tightened their belts.
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UK household available cashflow, which the analyst said was the best lead indicator for UK consumer spending, indicates a consumer recovery will take until at least until the end of 2022, the bank said, which it said contrasted with apparent current market expectations of a V-shaped recovery in 2021.
This implied “downside risk to consensus earnings even without the further risks of a second wave of the virus”, Citi said.
Dunelm and Next are now among the bank's least preferred names in the sector, along with B&Q owner Kingfisher PLC (LON:KGF), which were also downgraded to ‘sell' from ‘neutral’.
However, the Citi number crunchers upgraded Pets at Home Group PLC (LON:PETS) to 'buy' from 'neutral', with the price target scrubbed up to 280p from 265p.
Based on structural and valuation factors, the most preferred named in the sector are ASOS (LON:ASC), Boohoo Group PLC (LON:BOO) and Pets and Dixons Carphone PLC (LON:DC.).
Shares in Dunelm fell 3.4% to 1,188p in lunchtime trading, Next was down 4% to 5,004p and Kingfisher more than 4% lower at 216.8p, while Pets and Asos were also in the red to a lesser degree and Boohoo was modestly higher.