Black Friday – How to invest for the online retail revolution

Posted by Adrian Lowcock in Press releases category on 16 Nov 18

Black friday has firmly established itself in the retail calendar both in the UK and the US. Whilst some fear its arrival others are eager to grab big bargains that may be on offer.  Black Friday origins are murky but a common explanation is that it was the day where business was so strong for retailers it would be the turning point or many companies and they would begin to deliver a profit. 

2018 has been a dire year for the UK high street. Over 1,200 stores from major brands including Maplins and Toys R us.  The bad news for high street hasn’t been limited to the shops as restaurants have also felt the brunt with Jamie’s Italian, Prezzo and Strada amongst others having announced closures.  Despite attempts by shops to draw in the crowds with the events such as Black Friday, footfall continues to fall and is 2% low than last year, having dropped for 11 months in a row. 

But there is some bright spots in the sector. Online sales are booming, growing by double-digit percentages. Clicks are clearly beating bricks, and investors can access the changing behaviours and get profit from them. 

1. If you can’t beat them joint them

Why fight the inevitable. Online retail is here to stay and companies which have embraced it have become very successful strong brands and in some instance global leaders. For each passing year the online market space has grown rapidly yet it still accounts for only 18% of total retail sales in the UK so there is plenty of room for online retailers to grow.

2. Buy the picks and shovels

To get exposure to the online retail transformation doesn’t necessarily mean owning a retailer. Some of the best opportunities might be in businesses which support the online market place such as digital payment services, online advertising or the provision warehousing and distribution centres to help meet fulfilment of online orders. 

3. Back the Survivors

Retail is a tough industry, margins have been wafer thin for years and whilst the threat of the internet is fairly new retailers have faced many challenges before. The constant pressure on retailers creates an environment where reinvention in necessary and those companies that are able to adapt and survive the pressure have an opportunity to take market share from those who fail.  Recent examples of retailers not standing still include Tesco’’s launch of Jacks or Sainsbury’s purchase of Argos although each has yet to prove the ideas were the right ones. 

Investment  ideas

Tritax Big Box REIT

Those looking for exposure to the online trend, but not so keen on the higher risk/reward profile of an up-and-coming fashion name could consider Tritax Big Box.

This fund specials in the big warehouses needed by online companies to fulfil their orders.  This sort of asset also benefits from long leases and lease renewal as the companies leasing them need consistent and reliable locations to meet their needs. Investors looking to diversify their income stream are likely to continue to find this sort of investment attractive. 

It’s awkward and expensive for tenants to switch sites. This plays into Tritax’s hands when rent negotiation time comes around. Upwards-only rent reviews are a regular feature of agreements. 

Its structure as a real estate investment trust (REIT) means 90% of rental income has to be distributed to shareholders. An inability to retain earnings, plus an unwillingness to take debts beyond 40% of the portfolio’s value, means future expansion is likely to be funded by rights issues. 

Baillie Gifford Global Alpha 

If you can’t beat them join them. Baillie Gifford’s largest holding is in Amazon, a clear winner of the switch for customers to online retail. The fund has 11% in retailers and it is the largest sector exposure in the fund.  In addition the fund has exposure to other areas which touch upon the retail market, for example Alphabet which owns Google benefits from online advertising from retailers whether their operations are bricks or clicks based and MasterCard likewise is involved in payment processing no matter how the transaction is carried out. 

The managers target companies that offer sustainable above-average earnings and cash flow growth prospects. The team relies on bottom-up, fundamental research and favours companies with competitive advantages, superior business models, strong financials, good management and attractive valuations. The managers' approach is patient, so once they buy they tend to hold on for the long term, so investors should expect turnover to be low.

Schroder Recovery

The fund benefits from a strong management partnership that has been in place for over a decade. Fund managers Nick Kirrage and Kevin Murphy have demonstrated a strong working relationship and shared a sound investment philosophy since taking over the management of this fund in July 2006. Their process, which seeks to identify companies that are trading at significant discounts to their perceived fair values, starts with a number of valuation screens. Price relative to 10-year average earnings (cyclically adjusted price/earnings) is a key screen, but they also look at other metrics, including price/tangible assets. This reduces the universe to a manageable number of stocks, upon which the managers undertake more detailed research to eliminate any false positives. The managers are not constrained by the FTSE All Share benchmark when constructing the relatively focused portfolio. With investments driven by the best value opportunities, deviations at the sector and market-cap level can be sizable. This, combined with the managers' long-term outlook, can result in performance more volatile than the benchmark. For investors that can tolerate this extra volatility, the managers' resolute adherence to the strategy has seen them rewarded over the long term.

The fund has some exposure to the retail sector, around 7% with a 10 top holding in William Morrison Supermarket.