ABGSC on the Retail Sector: “Price increases are necessary to protect gross margins”

Fredrik Ivarsson is an equity research analyst at ABG Sundal Collier, covering companies within the retail sector. According to Fredrik, the outlook for companies within the sector varies, depending on product category and the ability of companies to offset cost inflation. In an interview, he gives his current thoughts on the sector.   
 
What trends are driving the retail sector now?
“Raw material inflation and surging freight rates are currently squeezing the consumer sector. As such, price increases are necessary to protect gross margins. Some product categories have benefited from COVID-19 (e.g. Home Improvement, Outdoor, Digital Entertainment) whereas others have suffered (e.g. Restaurants, Travel, Fashion). Depending on the strength of demand, some companies have been able to offset cost inflation through price rises whereas others face contracting margins. In particular, the DIY sector has seen unprecedented price inflation over the last year. More long-term trends include digitalisation, sustainability, price/value and health, just to mention a few.”
 
Most interesting company to follow in the coming months?
“Among the large caps, H&M is a recovering laggard we are following with great interest. The group is highly impacted by inflated input prices but has great self-help potential which could limit these headwinds, in our view. Among the small caps, we note that RugVista has plummeted by close to 30% from its peak levels, partly on the back of worries about tough comparables. A structurally growing market coupled with self-help potential makes this stock one of our top-picks within the e-commerce sector.”
 
Challenges for the retail sector?
“Short-term, the key challenges are the abovementioned surge in input prices coupled with supply chain disruptions. Long-term, companies need to cope with changing consumer preferences, which will require investments in digital transformations and sustainability. We believe that such worries could create attractive entry points.”
 
Opportunities for the retail sector?
“Digitalisation does not only come with challenges but also significant opportunities. For instance, companies that are able and willing to invest in artificial intelligence and data analysis will become significantly more efficient in their upstream supply chains, which will not only yield financial returns but also lower carbon footprints. Furthermore, digital channels allow for great expansion potential and a wider toolbox for communication. Lastly, we highlight automation as a key opportunity to boost productivity in the sector.”
 
What macro events will you be keeping an eye on?
“Needless to say, the development of the pandemic is key and infection rates will benefit some sub-sectors and hurt others. If consumer behaviour normalises, spending allocation could move from ‘COVID winners’ to ‘COVID losers’. Furthermore, surging energy prices could lower consumers’ purchasing power, which in turn could put more emphasis on the price/value trend.”
 
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