What’s in store for retailers?

Ian Forrest, investment research analyst at The Share Centre, analyses the performance of retailers over the Christmas period and outlines what’s in store for the future.

What’s in store for retailers?

The spotlight has most definitely been on the retail sector in recent weeks as the giants of the group gradually produced results for the all-important Christmas trading period.

In general, food retailers reported better than expected results as they benefited from the slowing pace of growth for the likes of Aldi and Lidl. All the while, clothing retailers saw more of a mixed picture as the theme of consumers switching spending from physical products to experiences weighed heavily on some.

Next, a bellwether for the clothing industry, was the first to report and the group was quick to highlight that difficult trading conditions and a cyclical slowdown in clothing and footwear were reasons why it had seen a continued fall in sales between 1 November and 24 December. There was further disappointment in end of season sales which were down 7% on last year.

There was however, a very different story for iconic British retailers Marks & Spencer and Burberry. Marks & Spencer stated that overall sales were up 4.3% with  clothing and home sales especially strong over the festive period, up 2.3% on a like-for-like basis, which was the first time they’ve risen for two years, thanks to better product ranges, availability and prices.

Luxury British brand Burberry also reported sales growth of 3%, with the company citing foreign exchange movements encouraging overseas spenders in the UK as reasons why. Increasing digital activity in all of its regions also helped the group make good progress with its ambitious growth and productivity agenda.

From the food retailer point of view, Tesco followed Morrison’s and Sainsbury’s last week in reporting sales growth indicating that the food retail sector is continuing to benefit from confidence in UK consumer spending.

Tesco indeed reported volume growth for the eighth quarter in a row as well as its first quarterly market share growth since 2011. Its success was linked to a significant market outperformance in fresh food despite it feeling the hit from not running its ‘Clubcard Boost’ promotion.

Morrison’s stated it had had its strongest performance for seven years over a Christmas period despite the continuing impact of store closures whilst Sainsbury’s highlighted that Christmas falling over a weekend helped the company to enjoy a bumper festive trading period, with like-for-like sales rising despite tough competition and increasing import costs. All in all, this was good news for investors.

Attention on the sector returned at the back end of last week when the Office for National Statistics reported disappointing retail sales figures for December. That raises questions as to whether rising energy prices, the weaker pound or the uncertainty around Brexit are having an impact and are likely to continue doing so. The figures go against the trend of strong consumer spending in recent years and an increase in credit-fuelled spending.

There has also been a Christmas trading update from electrical and mobile telecoms retailer Dixons Carphone suggesting that consumer electronics sales remain strong. It beat market expectations reporting a 4% rise in overall like-for-like sales, with the UK & Ireland up 6%. The company said Black Friday sales were the biggest ever and had been stretched across a seven-day period rather than just one day.

We would suggest that for investors interested in the retail sector there is certainly good news to be found in certain parts of what is a very large and diverse industry. However, investors should be aware that we believe fierce price competition and the success of online clothing retailers such as Boohoo and ASOS are likely to continue the squeeze on margins at some high street names for some time.

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