Christmas is just around the corner and the battle for customer numbers is heating up. A record £9.5bn in advertising is set to be spent this holiday season, up almost 5% on last year’s record spend. Retailers are clearly having to fight hard to capture consumers’ spending in the cost-of-living crisis.
The Christmas shopping season is usually the golden period for some retailers, helping sustain them throughout the quieter periods of the year. But a wide range of companies fall under the retail umbrella, with some being more sensitive to seasonal spending than others.
Here’s a closer look at three companies where the Christmas period is vital.
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Amazon – set to benefit from festive e-commerce boom?
A whopping 88% of US consumers are expected to make a purchase on Amazon this festive period and well over a third of US consumers are predicted to spend more online too. So, while total retail spending is expected to decelerate, spending online should have a merry old time.
These are the tailwinds that have led to Amazon hiring 250,000 thousand extra seasonal workers to deal with the Christmas rush. That’s not the behaviour of a company that’s nervous about demand.
A better-than-expected festive season would go down very well with investors. They’ve had to put up with some serious profit erosion in the last couple of years, after Amazon’s overspending and underdelivering on the retail side.
But these days, the growth story for Amazon is as much, if not more, about Amazon Web Services (AWS). The potential for this cloud giant is huge and is an area that Amazon bulls are especially focused on.
Ultimately, we think AWS’ position in the artificial intelligence (AI) and cloud area is a positive one. The substantial investment announced in AWS’ generative AI products speaks volumes to the expected pipeline of demand.
But as ever, there are no guarantees. If the consumer landscape is weaker than predicted, there could be an adverse market reaction when results come out in January.
Overall, the valuation is in a more sensible place at 42 times forward earnings – but that doesn’t rule out the risks of ups and downs.
View the Latest Amazon share price and how to deal
Marks & Spencer – serving up a Christmas delight?
Part of what makes Christmas time so special is the food. That means retailers with a big tilt towards food need to get their offering right.
The recent performance of Marks & Spencer’s (M&S) UK Food division has really impressed us, with volume growth outpacing all other mainstream food retailers in the last six months. Recent market data points to more improvements on this front, and we’re optimistic that M&S can continue gobbling up market share.
The Clothing division is also a growing and increasingly powerful string to its bow. Growing sales show the extent to which the company has regained some of its style credentials. Profitability in the division has also spiked as full-price sales made up a bigger share of the mix.
The group’s free cash flow has improved year-over-year and net debt has reduced. Both are good news and have allowed M&S to put dividends back on the table. Although remember, no dividends are ever guaranteed.
We should mention that not everything is on the up at M&S, with losses at its joint venture with Ocado widening from £0.7mn to £23.4mn. We think management should be able to turn things around and if it works out, would add an extra income stream given Ocado’s different demographic.
However, that’s likely to be a three-to-five-year project, so don’t expect a sudden about-turn in fortunes.
The valuation’s still sitting at the lower end relative to its peers. We don’t think that’s justified given that at the more premium end of the market, M&S shoppers aren’t as sensitive to price hikes.
The ongoing pivot to new locations and refresh of the group’s existing stores is another tailwind in our view. But a lot of work still needs to be done here so some volatility along the way can’t be ruled out.
View the latest Marks & Spencer share price and how to deal
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JD Sports Fashion – the perfect fit?
The global sports apparel market is huge – valued at $196bn in 2022 and expected to grow to $272bn by 2030. To service all this demand, JD Sports is rolling out stores all over the world, with upwards of 200 more expected this financial year.
The group’s sales mix by region is much better balanced than its biggest competitors, which helps smooth out bumps in the road if one market slows.
With US sales being a bit lifeless this year, this diversity has been a major driver of its outperformance relative to peers.
Strong brand relationships with key partners like Nike and Adidas help it secure exclusive items, designed to lure customers in. And because the group sits at the premium end of the market, it typically has healthier margins than its peers too.
We must point out that JD Sports operates in the corner of the retail sector that we think is most exposed to an economic downturn. That means if conditions deteriorate and consumers begin to feel the pinch, it will likely feel more pain than others.
The group had a net cash position of just under £1.3bn at the half-year mark, roughly 16% of the group’s total valuation. This is a huge cash buffer and could help to cushion any potential turbulence in the near term.
The company’s valued at 10.6 times forward earnings, significantly below its long-run average. This reflects the uncertainty surrounding the retail sector in the near term. But in the long term, we think this is an attractive valuation for a company which the market views as having strong revenue and profit growth prospects.
View JD Sports share price and how to deal
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