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Christmas retail round up

Sophie Lund-Yates takes a look at the retail sector following the important Christmas period, and what it could mean for investors.

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.

Christmas is crucial for retailers. The festive season can make or break shops, and January is when we get to find out how a lot of the big names have done.

The crucial winter trading months saw discount-centric Black Friday overtake Christmas as the biggest shopping week of the year, and political instability reached its peak. That culminated in a customer-base less likely to part with money, and, when it did open the coin purse, expected to pay less.

The British Retail consortium said 2019 was the worst on record, and the first to show an overall decline in retail sales.

So, with “difficult conditions” very much still the go-to phrase, how are things looking in the world of retail?

This article isn’t personal advice. If you are unsure of the suitability of an investment for you, seek advice.

Is there light at the end of the high street tunnel?

Discounting’s a particular problem for old school retailers, like department stores, who are already grappling with falling footfall and have large, costly store estates to maintain. Lower prices put extra pressure on margins and profits.

Take Marks and Spencer. Sales have been going the wrong way for a while, and it’s in the midst of an expensive restructure, which includes store closures. Investors would’ve been looking to the festive season to bring some cheer to proceedings.

Sadly this wasn’t to be. Overall like-for-like sales did nudge up 0.2% in the winter period, thanks to a good performance in Food, but the key Clothing & Home division is still struggling. Part of this was down to stock problems caused by M&S’ own hand, but it also reflected the result of price cuts over Christmas. In fact competitive pressures contributed to a paltry 1.5% increase in online sales – compared to 14% last year.

That’s marginally better than the 1.4% reported from John Lewis, who found it particularly hard to shift bigger-ticket technology over the festive season. Full year profits are expected to be significantly down on last year, and staff bonuses are in doubt for the first time since 1953.

Online sales now account for around 19% of all sales in the UK, so it isn’t that people aren’t shopping, they’re just doing it elsewhere.

While not a department store, Superdry’s had a tough time too. It expects full year underlying pre-tax profit in the range of £0 - 10m, following “unprecedented levels” of discounting, and said a popular Black Friday simply brought Christmas sales forward, leading to a limp performance over the holiday.

Next on the other hand saw full price sales rise 5.2% in the fourth quarter, which includes Christmas - beating its own forecasts, and leading to a £2m upgrade in profit expectations. That’s being driven by strong growth online, which offset a 4% decline in store sales. A stellar online performance leads to physical shops being an important part of the story, by supporting the popular click & collect function, as well as facilitating the vast majority of online returns, so that dip isn’t as concerning as it may sound.

More good news came in Dunelm’s post-Christmas update. The home furnishing specialist saw a whopping 33.2% increase in online sales, while like-for-likes in physical shops grew 2%.

Overall, unrelenting competition and changing habits mean it’s tough out there for everyone, for now. Long-term success will involve challenged retailers streamlining store estates and boosting their digital businesses, neither of which will happen overnight. In the meantime, there are other, more agile names better weathering the storm. Truth be told, the sector is still a very mixed bag, and we don’t see that changing any time soon.

See the latest Marks & Spencer share price, charts and how to trade

See the latest Superdry share price, charts and how to trade

See the latest Next share price, charts and how to trade

See the latest Dunelm share price, charts and how to trade

Super supermarkets?

On the face of it, food is a lot more defensive than other retail items - regardless of what the economy is doing, we all need to eat.

But that doesn’t mean food retailers are immune to pressure. Competition in this sphere is fierce, and consumer uncertainty has meant people are expecting to pay less for groceries.

Discounters like Aldi and Lidl have contributed to bigger supermarkets trying to eke out market share gains by lowering prices. Aldi's total UK sales in the four weeks to 24 December rose 7.9% from a year before.

Market share as at end of Dec in 2018 & 2019 (%)

Source: Kantar 9 January 2020.

Slashing prices is a tactic being employed by Sainsbury, who saw grocery sales edge up 0.4% in the third quarter. Significantly, the online business saw record order numbers over the Christmas period. Relying on promotions too heavily isn’t a long-term tactic, retail sales will need to grow faster in the future if margins and profits are to be maintained. As yet it’s not immediately clear how the group expects to do that.

Morrison’s Christmas trading was a little gloomier. Retail sales and like-for-like sales are in reverse, despite also cutting prices. That may be because Aldi and Lidl are a more direct threat, sitting closer to Morrison on the value chain. Looking ahead, the biggest challenge, and opportunity, for Morrison, is its online offering, which is severely lacking at the moment. It’s teamed up with Amazon to help the online giant to grow its own online grocery function, which could be lucrative, but won’t move the dial just yet.

Something both Morrison and Sainsbury will have an eye on is Tesco’s continued success. Tesco has a dominant market share, and although the restructuring of the European business is holding back overall performance at the moment, UK Christmas retail sales enjoyed a fifth year of growth. And, you guessed it, this was driven by cutting prices, as well as a good performance from its wholesaler arm, Booker. That suggests sales are being driven by volume increases.

All-in-all the supermarket landscape is crowded, and increasingly competitive. The big names are holding up fairly well, but we’ll be interested to see how they continue to manage the balancing act between volumes and price cuts to keep sales, and margins moving in the right direction.

See the latest Sainsbury share price, charts and how to trade

See the latest Morrison share price, charts and how to trade

See the latest Tesco share price, charts and how to trade

Hargreaves Lansdown's Non-Executive Chair is also a Non-Executive Director of Tesco.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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.

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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