Legal & General: retail profit growth opportunity lies overseas

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UK retailers have limited opportunity for profit growth in the domestic market but better chances overseas, according to the insurance firm Legal & General.

Richard Black, fund manager of the Legal & General UK equity income fund, said: “The British high street, and by extension the British retail sector, has experienced a tough few weeks with Jane Norman and Habitat amongst the high profile casualties,” he said.

“We believe with household debt at a high and real income under significant pressure, there is limited opportunity profit growth across the UK sector as a whole.

‘A further contributing factor is consumers’ migration online, eroding the profitability of the physical store bases and pressurising returns.

“Against this weak consumer backdrop, it is increasingly difficult for retailers to offset their own cost pressures, which include a weak pound coupled with rising distribution and operating costs.

“However, we do believe there are growth opportunities for some. As an example, we believe demand for global luxury brands will continue to grow robustly, driven by strong GDP growth in developing countries. 

“On this basis, we have a preference for companies like Burberry, a well managed and revitalised global brand with strong organic sales growth; which has the ability to deliver attractive levels of profit growth.

“Ultimately, current market conditions will see stock selection approach becoming ever more important. To that end we favour companies that can benefit from strong growth overseas as well as companies able to grow their business organically.”