Investors in Search of Bargains as U.K. Discount Retailers Soar

(Bloomberg) -- When it comes to U.K. retailing, investors and consumers have one thing in common: Both are putting an emphasis on value.

Stocks from budget homewares seller B&M European Value Retail SA to sausage-roll purveyor Greggs Plc are having a stellar year, with gains being driven by shoppers’ desire for a bargain or an affordable treat. Their advance contrasts with a third straight year of declines in more middle-market names such as Debenhams Plc and Marks & Spencer Group Plc, which are contending with higher costs at a time when customers are seeing little wage growth.

“Consumers appear to be responding to their changing circumstances not so much by spending less, but by changing where they spend and how they spend their money,” said Abi Oladimeji, chief investment officer at Thomas Miller Investment Ltd. “They’re picking discount stores over midmarket retailers and spending on necessities rather than big-ticket items. This is redefining the dynamics of various sectors and creating winners and losers.”

As consumers shop around for the best deals, one big advantage the discount retailers have is that some of their prices are so low that they don’t attract the competition from online retailers that has long weighed on the middle market. For example, you’ll struggle to find a single duvet online for B&M’s price of 6.99 pounds ($9.30). One of the reasons that Associated British Foods Plc’s Primark chain is able to offer fashions as cheaply as it does is because it doesn’t have the expense of an online offer or related marketing.

B&M shares have jumped 43 percent this year, outperforming the FTSE 350 General Retailers Index’s 0.1 percent rise. Greggs has gained 32 percent, budget retailer Card Factory Plc is up 25 percent and AB Foods has advanced 22 percent.

With more than 12 percent of stores on U.K. shopping streets standing vacant, according to Local Data Company, the chance is there for the budget chains to expand further.

“Discounters are underpenetrated in the U.K. and they have an opportunity to grow their store base,” said Amisha Chohan, an analyst at Quilter Cheviot Investment Management in London. “It depends on how quickly discounters increase their store expansion, but for the foreseeable future it seems that there’s still at least a few years of growth ahead of them.”

B&M is a favorite among investors looking to benefit from a tougher U.K. retail environment and was recently named one of Goldman Sachs’s “Best of British” stock ideas. The company fills a gap in the market for consumers looking for value in homewares, according to asset manager AllianceBernstein, whose AB Concentrated International Growth fund has B&M as the only U.K. retailer in its portfolio of about 30 stocks.

“If you’re a traditional U.K. retailer, whether it’s food or clothing retailing, you get squeezed by the discounters at one end and online at the other, and that’s a very tough place to be,” said Mark Phelps, chief investment officer of global concentrated equities at AllianceBernstein in London. “B&M’s coming from a different starting point. They are one of the very few expanding physical retailers.”

Phelps has owned B&M since the company’s initial public offering in June 2014.

Not all companies focused on value-driven shoppers have done well. Shares in home-furnishings retailer Dunelm Group Plc have fallen 6.8 percent in 2017, hurt by increased costs and intensifying online competition.

“In these circumstances, the discounters should do better,” said Cesar Perez Ruiz, chief investment officer at Pictet Wealth Management in Geneva. His firm is broadly underweight on U.K. equities, preferring emerging markets for exposure to consumers. “There are better opportunities worldwide that you can make.”

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Paul Jarvis, John J. Edwards III