Second Covid-19 wave likely to close 12 million m2 of retail space

Summary

• Due to the fears of a second coronavirus wave, landlords and developers could likely close around 12 million m² of retail space and look for substitute tenants.
• Study by Altus Group said around 38 per cent of the 400 property development companies are converting their retail properties to other usages. Another 57 per cent could also follow suit.
• Non-food retailers have suffered due to lesser footfalls, rise in online shopping, change in consumer demands, and rental costs.

The fear of a second wave of Covid-19 infections during the winter season might compel the landlords and developers to close around 12 million square metres of retail space and look for substitute tenants. We present the scenario in the high street retail sector and discuss the performance of some leading retail stocks.

According to a recent study by Altus Group Limited that included more than 400 heads from property development companies, approximately 38 per cent of the executives were converting their retail properties to other usages. In addition, around 57 per cent were mulling over to follow suit. The survey results indicated the sufferings at the high street due to the coronavirus-led crisis are not likely to end in near future. Altus Group provides technology solutions to commercial real estate.

The annual Global Property Development Trends report by Altus mentioned that a second sustained wave of Covid-19 infections is expected to potentially increase the worries of the high street retailers. The pandemic crisis has strained the non-food retailers due to lower footfalls in their outlets. There has been a considerable shift towards online shopping, change in consumer demands, and rental costs. Estimates have suggested that due to the pandemic, there has been a loss of around £9 billion in sales so far in 2020.

Altus observed that the pandemic has considerably accelerated a decline in rental income and failures for the property owners and developers. The commercial realty consultancy said that the industry has recognised the existing challenges and intends to repurpose the assets during these crisis times for a potential recovery. The crisis has been deepened due to the fear of a second wave of Covid-19 infections and the call from the government to continue working from home wherever possible.

Retailers in England and Wales have not been able to keep up with the rents. The Centre for Retail Research agreed that around 12.5m m² of total retail space would need to be altered as there remains no other viable option. It informed that in 2020 so far, around 13,867 shops had been permanently closed, which was a 24.8 per cent increase on the same period in 2019. In the short-to medium-term, almost 10 per cent of retail floor space might be repurposed. This number would eventually increase in major cities. Altus highlighted that there could be a shift to mixed-use properties with likely focus on creating community-type spaces.

Confirming this trend, IWG plc (erstwhile Regus), serviced office company, said that the coronavirus-led crisis has strongly impacted its business, besides bringing an unprecedented challenge. The company plans to cancel £790 million worth of lease agreements in coming times if landlords disagree to slash rents. According to media reports, Regus, subsidiary company of IWG might soon file for insolvency. The insolvency would lead to dissolving lease contracts across its 500 sites. The Regus subsidiary accounts for around 15 per cent of IWG’s international rental contracts. In Britain, IWG’s other brands are OpenOffice, Spaces, Signature, and No18.

Let us have a look at some of the high street retailers and their stock performances.

Pets at Home Group plc

Pets at Home Group Plc (LON:PETS) is in to the business of pet care. The company ensures that both the pet and their owners receive the best required advice, products, and care. The various products related to pet care are available both online and at the company’s more than 450 retail outlet stores. Some of the physical outlets of Pets at Home have vet practices and grooming salons.

Recent financial updates: On 24 September 2020, the company released the trading update for the first quarter of the financial year 2021 that ended on 31 July 2020 and covered the 16-week period from 27 March to 16 July 2020. Pets at Home compiled consensus for entire year post-IFRS16 pre-tax profit (PAT) at £73 million.

The company mentioned that the sales momentum returned across all areas of its business in the last eight weeks of the quarter. In addition to a return of normal shopping habits among the customers, there was re-instatement of services and permitted procedures across the company’s both retail and veterinary segments. The company also said that that the momentum continued in the second quarter of the year and it delivered a double-digit like-for-like growth in customer sales into and through the eight weeks period to 10 September 2020.

Pets at Home said that the growth demonstrated various factors, including inherent buoyancy in its business model and the market of pet care. The company benefited by quickly adapting its operations to changing customer behaviour and likings, continued investment in omnichannel capabilities, customer acquisition channels, and innovative owner-managed First Opinion veterinary model.

Despite the uncertainties surrounding the second wave of COVID-19 infections and risk of another lockdown, Pets at Home’s had been able to retain a strong balance sheet. On 24 November 2020, Pets at Home would be announcing its FY21 interim results.

Stock performance: On 28 September 2020, at 10.07 AM, the company’s stock (LON:PETS) was trading at £387.80 down 1.67 per cent from its Friday’s close of £394.40. The 52 week low high range was recorded as 195.00 and 394.40. With a market capitalisation (Mcap) of £ 1,972.00 million, the stock provided a positive return on price, which was plus 37.42 per cent on a year to date (YTD) basis. The total volume of shares traded at the time of reporting was recorded at 200,588.

Halfords Group plc

Halfords Group plc (LON:HFD) is one of the UK’s leading providers of motoring and cycling products and services. It operates more than 444 Halfords outlets, performance cycling stores that trade as Tredz and Giant, 367 garages that trade as Halfords Autocentres and McConechy's. The company runs 91 mobile service vans that trade as Halfords Mobile Expert and Tyres on the Drive. Halfords has a significant online division where customers could buy its products and book garage services.

Recent financial updates: On 8 September 2020, Halfords Group released its financials for the twenty week period ending August 2020. The company’s revenue was up plus 7.5 per cent and plus 5.0 per cent on a like for like basis. The liquidity was strong during the period, with net cash of £105 million on 21 August 2020, approximately £70 million better than the same date in 2019.

The company posted a strong trading performance as sales were up plus five per cent on a like for like basis. The sales were driven by growth in the cycling market and a positive result of the current staycation trend, advantages gained from the company’s new web platform, and increasing scale in its motoring services business. The service-related sales were up plus 6.3 per cent, the B2B sales growth was plus 25.9 per cent and online sales were up plus 160 per cent Halfords Group is on track to deliver 300 basis points (bps) of gross margin improvement in its cycling business in FY21.

The company said that a strong strategic execution and operational excellence facilitated it to capitalise on market tailwinds. Given the demand level expectations for September 2020 and a stabile relative value of the US dollar, the underlying H1 FY21 profit before tax (PBT) is expected to be in the range of £35-40 million. Due to a decline in the cycling and staycation products in the winter season and a tough economic outlook, H2 FY21 PBT is likely to be lower as compared to H1 FY21. On 18 November 2020, Halfords Group would release its interim results.

Stock performance: On 28 September 2020, at 10.56 AM, the company’s stock (LON:HFD) was trading at £185.40 up 0.43 per cent from its Friday’s close of £184.60. The 52 week low high range was recorded as 51.85 and 196.60. With a market capitalisation (Mcap) of £367.57million, the stock provided a positive return on price, which was plus 8.40 per cent on a year to date (YTD) basis. The total volume of shares traded at the time of reporting was recorded at 229,863.