Sector Screener: growth potential at two household names

Everyone knows who these companies are, and analyst Robert Stephens believes both offer good value and have the potential to generate long-term share price growth.

15th July 2025 11:01

Robert Stephens from interactive investor

The investment prospects for UK-focused retailers may appear to be rather downbeat. After all, inflation remains 140 basis points above the Bank of England’s 2% target. According to the central bank’s forecasts, it will further rise in the short run to around 3.7%, thereby potentially putting additional pressure on consumer spending.

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Higher-for-longer inflation typically means interest rate cuts are less likely in the short run. Given that Bank Rate remains at a much higher level than consumers had become used to since the global financial crisis, it could act as a drag on cyclical companies such as retailers. And while the UK economy expanded by a relatively brisk 0.7% in the first quarter of the year, its growth rate is widely expected to deteriorate in the second quarter after GDP contracted in both April and May.

All this means that consumers are relatively downbeat. Certainly, consumer confidence rose sharply during 2023 and even flirted with its pre-pandemic level in 2024. Since then, though, it has waned somewhat and now stands at a level of -18 versus -14 a year ago. This is likely to have contributed to a fall in retail sales volumes of 2.7% in May, which is their largest monthly decline since December 2023.

Improving long-term prospects

While the near-term outlook for retailers may appear to be exceptionally tough, it may not be quite as negative as many investors believe. While inflation is above the Bank of England’s target, it remains below the rate of wage growth and has been for nearly two years. This means that consumers are still enjoying an increase in their spending power that could mean they are gradually becoming less price conscious, thereby creating opportunities for retailers to expand profit margins via price rises.

Furthermore, recent interest rate cuts are likely to have their full impact on the economy’s performance and wage growth over the coming months. Certainly, only one percentage point has been shaved off Bank Rate thus far in the current monetary policy easing cycle. However, given that the first interest rate cut was 11 months ago, and there have been two reductions in the past six months alone, it seems to be a little too early to write off the impact of a looser monetary policy on the retail sector.

Inflation, meanwhile, is forecast to fall over the medium term, according to the Bank of England. It expects the annual rate of price rises to meet its 2% target in 2027. This should mean further rate cuts are possible, given that above-target inflation is expected to be only temporary. This could have a further positive impact on the economy’s rate of expansion and on wage growth, particularly in real terms, which leads to a more buoyant consumer outlook and an increase in confidence.

			Performance (%)
Rank	Top five FTSE 350 sectors over one year	Price	One-month	Year-to-date	One-year	2024
1	Aerospace & Defense	19,066	7.0	65.4	75.1	34.2
2	Precious Metals & Mining	18,532	2.1	82.4	65.7	2.6
3	Tobacco	43,161	4.5	27.1	48.5	29.6
4	Leisure Goods	39,392	-2.3	19.1	46.9	37.4
5	Banks	6,069	4.4	23.0	41.2	34.0
24	Retailers	2,690	-1.3	9.3	1.1	-5.6

Source ShareScope. Data as at 14 July 2025. Past performance is not a guide to future performance.

			Performance (%)
Rank	Bottom five FTSE 350 sectors over one year	Price	One-month	Year-to-date	One-year	2024
39	Household Goods & Home Construction	10,609	-11.7	-2.9	-24.6	-16.6
38	Industrial Metals & Mining	5,504	6.5	-5.5	-20.1	-14.6
37	Beverages	17,593	-0.6	-15.8	-15.8	-7.0
36	Chemicals	7,204	2.4	1.1	-14.7	-25.7
35	Real Estate Investment Trusts	2,073	-3.5	3.4	-13.3	-16.5

Source ShareScope. Data as at 14 July 2025. Past performance is not a guide to future performance.

Share price volatility

An improving outlook for retailers could, of course, prompt stronger investor sentiment. Currently, several UK-focused retailers trade on modest earnings multiples that may not factor in their potential to deliver increasing profitability over the long term. In some cases, their market valuations also fail to recognise that the company in question is very likely to survive economic shocks due to their sound finances, while a strong competitive position means they are well placed to capitalise on a subsequent economic upturn.

Of course, investors in the retail sector must accept that near-term share price volatility is likely to be high. There could be significant paper losses in the coming months as a combination of time lags following interest rate cuts, elevated inflation and potentially weaker GDP growth have a negative effect on consumer confidence and retail sales.

However, investors who can look beyond the near term could be well rewarded simply by purchasing a diverse range of UK-focused retailers that are fundamentally sound, offer a margin of safety and are positioned to benefit from the economy’s inherent cyclicality.

			Performance (%)
Company	Price	Market cap (m)	One month	Year-to-date	One year	2024	Forward dividend yield (%)	Forward PE
Marks & Spencer	333.3p	£6,719	-11.0	-11.2	7.7	37.8	1.6	12.9
WH Smith	1,057p	£1,317	-2.2	-11.1	-12.8	-10.9	3.3	12.5

Marks & Spencer

Marks & Spencer’s latest annual results showed that retailers can still deliver a strong performance despite the presence of an uncertain near-term economic outlook. The FTSE 100 company posted a 30% rise in earnings per share in the 12 months to March 2025, with higher sales and cost reductions having a positive impact on its bottom line.

Of course, since the financial year-end the company has been subject to a cyber-attack. It contributed to a sharp share price decline, with the firm’s market valuation being around 20% down on its level from just prior to Easter. Still, the stock has risen by 54% since first being discussed in this column during October 2023. This compares with a 21% capital gain for the FTSE 100 index over the same period.

Clearly, the cyber-attack is set to have a negative impact on the firm’s short-term performance. According to its annual results, the company expects it to reduce operating profits by around £300 million this year before the effects of mitigating actions are taken into account.

While this is disappointing, the company’s shares now trade on a current price/earnings (PE) ratio of just 10.7 following their recent decline. This suggests that investors may have priced in a near-term fall in profits, with the stock appearing to offer a wide margin of safety.

With Marks & Spencer Group (LSE:MKS) having a net debt-to-equity ratio of 71% and net interest cover of 5.6 last year, it seems to be well placed to overcome potential sector-related uncertainty. Given its bottom line is forecast to be 10% higher in 2027 than it was in 2025, it appears to offer a favourable risk/reward opportunity for the long term.

WH Smith

WH Smith (LSE:SMWH) could also offer long-term investment potential. Although the company continues to expand its international presence, 54% of revenue from its travel division, which includes stores at railway stations, airports and hospitals, is generated from within the UK. Therefore, it could be a beneficiary of further real-terms wage growth that provides scope for higher prices and rising margins.

The company recently completed the sale of its UK high street stores. Given that their performance has been lacklustre of late, this allows the firm to focus on its higher-growth travel segment. With a pipeline of more than 90 stores, which equates to around 7% of its total store estate, it appears to have long-term growth potential. And with an interest coverage ratio of just over 4, the firm appears to have the financial means to overcome potential economic uncertainty in the meantime.

Having fallen by 11% since first being discussed in this column during October 2023, the stock currently trades on a current PE ratio of 12.2. This suggests it offers good value for money given its long-term growth prospects. The company’s latest trading update, meanwhile, stated that revenue rose by 7% in the third quarter of the year and that it is on track to meet full-year financial guidance.

As per Marks & Spencer, WH Smith’s share price could prove to be volatile in the short run as elevated inflation, a restrictive monetary policy and weak economic prospects potentially combine to prompt further lacklustre consumer confidence. However, the firm’s growth strategy indicates that it could be a beneficiary of an improving outlook for the retail sector over the coming years.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.

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