Indeed retail stocks are trading on huge discounts to companies in more fashionable

Indeed, retail stocks are trading on huge discounts to companies in more fashionable sectors. But investors hunting a bargain should buy into department stores with care.
Like other “consumer cyclicals”, the retail sector has suffered amid concerns over deflation, rising interest rates and the threat from the internet. The rating given to general retailers by the stock market assumes its earnings will fall 4 per cent for the next 10 years.HSBC, the investment bank, reckons the market is being too pessimistic. It says the expected economic slowdown in the UK next year has more to do with declining global trade than consumer spending, which is likely to hold firm.

As interest rates fall and the sector restructures, retail stocks should recover in 2001. Meanwhile, concerns over competition from the internet look set to subside, as they have already in the banking sector.All the same, Britain’s leading department store groups are in varying states of health.DebenhamsDebenhams is at last enjoying success in flogging clothes to its target market, the maturer shopper. Clothing sales have been ahead of the sector for the last four months, and shares in the company have been staging a mini-recovery from their collapse in 1999.Debenhams’ success stems from enjoying a degree of pricing power through own brands and “Designers at Debenhams” lines. The group has also focused more on non-clothing products, such as homewares.The shares’ recovery gathered pace in September when Terry Green resigned as chief executive, to be replaced by Belinda Earl, the group’s former trading director. Mr Green’s plans to acquire rival Storehouse had unsettled investors, and many were glad to see him quit for Bhs.

The challenge facing Ms Earl is to sustain the current rate of sales growth. Next month’s trading statement will indicate how she is doing. CSFB, the house broker, forecasts pre-tax profits of £140m this financial year, rising to £150m in 2002. The shares, up 12p at 292p, trade on a multiple of 11 times forecast earnings per share of 27.5p in 2001, high enough at this point in Debenhams’ recovery.. One of the cautionary tales used to warn off investors during the great technology speculation of the past three years – so often in fact that it became a bit of a cliché – is that during the Klondike goldrush at the end of the last century, it was those selling picks and shovels in the frontier towns that ended up making the most money, not those out prospecting for gold in the hills and rivers of the Yukon.