Jefferies analysts on Tuesday reported that small and mid-cap retail and consumer companies in the UK are trading at around a 15% discount to their long-term average valuation. The investment bank, which recently hosted a group of 10 companies from the sector, concluded that those firms are generally in a stronger position to withstand inflationary pressures than they were in 2022-23.
The bank highlighted a number of company-specific observations from the meetings. Cranswick was noted for showing greater resilience to inflationary costs and for its confidence in sustaining premium growth in its poultry division as it approaches the opening of a new facility. Greggs conveyed an upbeat stance, particularly around its ability to extract profits in the first half. Wickes indicated it remains confident about winning further market share despite an uncertain trading environment.
Jefferies also cautioned that the ongoing conflict in the Middle East is likely to exert sector-wide headwinds. While direct supply chain disruptions so far remain limited, the analysts expect additional fuel surcharges from shipping companies. They also warned that higher energy, fuel and food prices are likely to reduce disposable incomes and could weigh on consumer confidence across retail categories.
Importantly, the report stresses that companies appear better prepared than during the 2022-23 inflation spike. Management teams are employing broader and longer-dated hedging arrangements for energy and other commodities. Jefferies pointed to recent trading updates from a range of listed names, including Pets at Home, Moonpig, AO World, Asos, THG and Boohoo, which have consistently met profit expectations in their latest communications.
The sector collectively is trading at roughly 11 times earnings, according to Jefferies. The bank retains positive ratings on AO World, Moonpig and Wickes, citing their potential to drive growth via market share gains.
Context and implications: The notes from Jefferies indicate pockets of opportunity in UK small- and mid-cap retail, with valuation discounts and firm-level preparedness for inflation-related shocks balancing against external cost pressures linked to geopolitical developments. Market participants will likely watch energy and shipping cost passes closely as companies update guidance.