A great many things, according to conventional wisdom, will never be the same again.
Cities have been changed irreparably by coronavirus. So have air travel, offices, politics, sport and money. Also on the news media’s Covid-19 hit list are real estate, video games, dating, cruising, restaurant buffets, movie sex scenes and the news media. It is difficult to find any avenue of life that has not been identified as going through some profound structural change.
One of the most common subjects is general retail. The crisis, we are told, is a potential existential moment for the high street, the shopping centre and the entire fashion industry.
Such doomsaying is being taken seriously. Steve Rowe, chief executive of Marks and Spencer, said on a results call this week that he was looking for breaks from landlords because “the world will never be the same again”. Geoff Ruddell, Morgan Stanley’s retail analyst since 2005, wrote in a recent note that the effect of Covid-19 on the industry “is set to be so profound that it will render irrelevant most of the research we have ever written”.
Everyone is agreed that change is coming. What we lack is a consensus of what that change might be.
Consider the performance of share prices since the start of the crisis. While the FTSE 350 General Retailers index is down 21 per cent over the past three months, there is a wide divergence between the winners and losers over that period, offering clues on where investors think future earnings power will be concentrated.
The shorter term outlook is easy to map, relatively speaking, with shops able to trade through the lockdown period outperforming. Of the rest, the assumption is that post-lockdown profitability will be crushed by a combination of higher operating costs and lower demand.
Social distancing will have a greater effect on high-volume stores such as Primark than on out-of-town operators such as B&Q, the home improvements chain. AB Foods, Primark’s owner, is down 36 per cent in the past three months while Kingfisher, B&Q’s owner, slid 19 per cent. (It helps that Kingfisher was able to reopen some stores late last month.)
It is unsurprising, too, that companies without much real estate have been gaining favour. AO World, an online-only white goods retailer that was able to pick up business lost by hobbled rivals such as Dixons Carphone, is the sector’s top performer over the past three months, with a gain of more than 50 per cent. Shares in Dixons have nearly halved over the same period.
Niche shops requiring special visits have also proved resilient. But operators dependent on crowded high streets and shopping centres have entered what threatens to be a vicious cycle.
Card Factory has dropped two-thirds in the past three months while Frasers, the owner of Sports Direct and House of Fraser department stores, has almost halved. Meanwhile Games Workshop — which has a monopoly over Warhammer tabletop games, selling to a fervent fan base via small backstreet shops and online — has moved to within touching distance of promotion to the FTSE 100. Its three-month loss is just 7 per cent.
Do these moves tell us anything about the new normal? Mostly, they tell us that investors have not rethought very much at all.
Dying high streets, online cannibalisation, profitable niches and the fading appeal of multi-line retail have been the sector’s dominant themes for more than a decade. Covid-19 is expected to accelerate rather than alter those secular trends. The future of retail has stayed much the same, but will be arriving more quickly.
Meanwhile, world economies have entered what may be the worst recession of a lifetime; one whose duration relies almost entirely on a medical breakthrough. By 2022 the shape of the world will be fundamentally changed, much the same, or somewhere in between. No one knows, and those making guesses should be prepared to be wrong.
Within that context, long-term valuations can provide a prognostication sense check. Games Workshop now trades at around 30 times consensus earnings forecasts for its fiscal year ending 2022, according to estimates tallied by Refinitiv. Boohoo, the online clothes retailer, is valued at 42 times earnings for the same year while M&S and Dixons are both on 6 times. The gap between expected winners and losers has widened to a chasm.
That investors have responded to uncertainty by crowding into favoured themes is to be expected. Betting on an acceleration of longstanding trends, of course, risks overvaluing structural change and undervaluing any return to the previous normality. If the future comes to resemble the past, current valuations on both ends of the scale will look very silly.