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  • How can investors benefit from the retail park renaissance?

    We look at three companies that could stand to benefit from the post-pandemic strength of retail parks.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Lockdowns seriously hurt traditional retailers. The pandemic has also accelerated the shift to online, meaning existing challenges have simply become more prominent.

    But among the doom and gloom, there’s an unsung hero in the bricks and mortar retail world – retail parks.

    Retail park footfall has recovered much faster than we’d feared. According to major corporate landlord, British Land, these parks are almost as busy as they were before the crisis.

    We think this trend is likely to continue. Out of town retail parks are roomier, making social distancing easier. They’re also handy for click and collect, and don’t have the same traffic and parking pressures as the high street.

    The types of shops found on these estates could be more resilient too. There are often speciality stores, which should face less pressure from online competitors.

    Investing in individual companies isn’t right for everyone – it’s higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio. Investments will rise and fall in value, so you could get back less than you invest.

    This article isn’t personal advice. If you’re not sure whether an investment is right for you, seek advice.


    Most of Dunelm's 173 stores are in out-of-town locations. In 2020, Dunelm’s sales only fell 3.9%, with sales actually rising 6.8 % in the eight months to February 2020. Lockdown store closures after that point were largely offset by a huge increase in Dunelm’s digital capabilities – there was a 105.6% increase in online sales overall. This is where the pandemic has helped the home furnishings specialist.

    We’ve all spent more time at home than we’d thought possible over the last 18 months. That means there’s been a large increase in demand for homeware. It’s more important than ever that our homes feel comfortable.

    For the financial year ending 26 June 2021, Dunelm’s sales of £1.3bn were 21.4% above pre-pandemic levels, despite rolling store closures. The group’s also growing ahead of the wider home furnishings market. We suspect that some of this increased demand will stick around for quite some time.

    Homewares market

    Source: Dunelm 2020 annual report

    Please note that at the time of publishing, figures for years 2020 - 2022 are estimated figures.

    The lack of serious disruption to the business is testament to the expedited efforts to bring more of Dunelm’s business online. Looking further ahead, some physical stores will, we think, always be wanted – sofas and curtains are the kind of thing people like to look at in the flesh. But having a stronger home delivery proposition is a serious benefit as the world becomes more digital.

    Dunelm’s expectations for full year profit are better than some analysts were expecting. That’s largely thanks to strong cost control. This, plus stellar efforts to improve inventory and buying processes, feeds into a fairly remarkable net cash position of £129m. That helps add a layer of support to the 2.9% prospective yield. Remember though, yields are variable and not guaranteed.

    A price-to-earnings ratio of 19.8 is usually what you’d expect for a reliable consumer giant rather than a retailer. That means the market has high hopes for Dunelm, but investors should keep in mind it increases the risk of short-term volatility.

    Exactly how demand patterns are going to shape up is tough to map. But we think Dunelm is well placed to take advantage of the increased demand for home furnishings. The work that’s been done on its internal processes, and customer proposition will also hold it in good stead. As ever, nothing is ever guaranteed.

    See the latest Dunelm share price, reserach and charts


    Next is a retail park staple. Just under two thirds of the group’s sales came from retail parks before the pandemic, and the group said its stores in these locations fared much better than its other sites.  

    A big reason for this, we suspect, is thanks to Next’s strong Click & Collect offering. In the 2021 financial year, almost half of all online customers used Click & Collect to pick up their order, while a huge 80% used a shop for returns.

    The wider online business is much better at Next than for competitors. Its history as a catalogue company meant it had a lot of the infrastructure in place when online shopping sprung up. Having a more mature digital business was a big advantage during lockdowns and helped offset some of the effects of store closures.

    Looking to the future, Next still has a lot to offer. It has once again said it’s trading “materially ahead” of expectations, with underlying profit guidance being upped by £30m to £750m for the full year. That’s a very impressive feat when you consider the ongoing disruption, and was achieved thanks to the group’s homeware business and third party and overseas online sales. We expect these areas to continue to buoy Next over the long term.

    That strength means Next has decided to pay a special dividend. The prospective yield for the next 12 months is 2.5 %. We think there’s room for the yield to grow too, thanks to Next’s competitive advantages and strong cash generation. But that’s not guaranteed, and yields are variable.

    Next sales growth since 2005

    Source: Next 2021 full year results

    While we think Next is one of the best placed retailers, we’d be remiss not to mention the challenges.

    Even as more of us return to the high street and shopping centres since lockdown, the industry is still in overall decline. That will inevitably hold Next back to some degree. We expect to see the store estate shrink even further in the coming years. Next’s shorter-term, more favourable lease agreements gives it more flexibility than others, but it’s still something to keep in mind.

    Next has proved itself to be a well-run, efficient company with growth opportunities. As the world of retail changes rapidly, Next’s Click & Collect, strong online and financial positions mean it should prosper. Investors should remember that with so much upheaval happening in the sector though, it’s crucial to take a long-term view and there are no guarantees.

    See the latest Next share price, reserach and charts

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    Pets at Home

    Pet ownership soared during the pandemic. That has immediate benefits for a pet superstore – puppies and kittens need food and toys. But it’s also a long-term money-maker.

    Pet owners are recurring customers. And this sticky revenue is what we like most about Pets at Home. Plus, the group has only just started to utilise the opportunities from its 7 million or so “VIP” members. These members are far more likely to spend across multiple channels, which brings us to Pets’ strong cross-selling capabilities. Pets at Home’s vet services and grooming rooms mean the group is a one-stop shop for all pet needs.

    Pet care market value 2020

    Source: Pets at Home 2021 annual report

    The theory sounds good, but what about the financials? We can’t say there’s much to complain about there. Like-for-like sales are currently running over 29% ahead of pre-pandemic levels. Net cash of £1.4m gives the group the firepower to carry on investing.

    And speaking of investing, that’s something the group’s been doing a lot of, with £28.5m spent in digital innovation and extra distribution capacity last year.

    Online sales have more than doubled since 2019, largely because of the pandemic, but we suspect there’ll be a permanent increase in demand here. It’s crucial the group can sustain the increases online because of all the spending that’s gone on adding capacity. If sales were to stagnate or slump, those warehouses will quickly become a drag on profits.

    We’re supportive of the plan and the signs are good – but Pets needs to pull off near perfect execution if it wants to keep competitors at bay and keep margins moving in the right direction.

    The added pressure comes from the group’s current valuation. At 23.5 times expected earnings, the market is clearly excited about what the UK’s pet-boom will mean for Pets at Home. We’re inclined to agree with that sentiment and can’t knock progress so far. But investors need to keep in mind that high expectations mean the market reaction could be severe if things don’t go exactly to plan.

    See the latest Pets at Home share price, reserach and charts

    Sign up to receive Pets at Home research direct to your inbox

    Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

    This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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      Important notes

      This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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