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Christmas retail round up – how have retailers fared?

Following the important Christmas period, we take a closer look at how the retail sector fared, what could be next 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.

The festive period is crucial for retailers. Customers spend on average close to £740 more in December than a normal month. And when January comes round, most of the big names treat the market to trading updates.

Broadly speaking, in the build up to December, retail was on a good run – the value of sales were up 6.2% on the previous year. Omicron fears then put the brakes on as December came round. Sales fell 3.1% as more shoppers stayed at home and physical footfall dropped.

Retail sales volumes, seasonally adjusted, Great Britain

Source: Office for National Statistics – Monthly Business Survey – Retail Sales Inquiry, January 2022.

Following a tricky December for the sector, we take a look at how a few names have fared.

This article is not personal advice, if you’re unsure whether an investment is right for you, seek advice. All investments can fall as well as rise in value, so you could make a loss. Past performance isn’t a guide to the future.

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.

Is the high street hanging on?

New Covid-19 fears were the last thing on the wish list for more traditional retailers, who’ve historically relied on footfall in their large, expensive, stores to shift product. But thanks to the work done over the last couple of years to build out online offerings, it meant restrictions weren’t the end of the world for some well-known names.

Next is a prime example. Management came out with another guidance upgrade in their fourth quarter trading update, as formalwear and occasion-wear came back into fashion in the run up to Christmas. Full price sales were up 20% on pre-pandemic levels, £70m ahead of expectations. Physical shop sales dropped over the period, but a 45% boom in online sales paved the way for a strong Christmas period.

Another success story over the Christmas period comes from Marks & Spencer who posted record trading. Group sales were 8.5% ahead of pre-pandemic levels with growth in all business areas. Improved performance in full price Clothing and Home is notable, considering it’s been a challenging area in recent times and subject to major overhaul. A 45% rise in sales was aided by the expansion of in store fulfilment, with online sales up almost 51%.

The group’s partnership with Ocado.com is another sign of the new era for traditional retail. Food sales reached record highs as M&S products made up almost a third of baskets on Ocado.com in December.

It was a slightly different story at one of the UK’s best known specialist retailers. A boost in online sales, up 29% compared to 2 years ago, wasn’t enough to stop electrical and white goods specialist, Currys’ sales falling over the period. Like-for-like sales fell 5% compared to last year, with demand for technology dropping and supply chain issues weighing. That meant full year underlying profit before tax guidance was dropped down slightly, from £160m to £155m.

Face-to-face advice is a key competitive advantage and innovations like ‘ShopLive’ mean customers can get access to experts from home. Longer term, the group's foundations still look intact. The reinforced balance sheet and strong expected net cash position are real positives.

Without much of an online offering, Primark owner Associated British Foods has had to rely on other sources of revenue while stores were shut – Sugar, Grocery, Ingredients and Agriculture. But clothing sales have made a comeback as stores have reopened. Omicron scares have kept a lid on the recovery, but Retail sales were up 36% over the latest quarter, which includes the festive period. Retail parks, rather than city centre stores, continue to be the main attraction for customers.

Inflation could halt any operating margin improvements, with the group aiming to exceed 10% this year. Cost controls and well managed inventory have helped so far. But as a discount retailer, there’s not much wiggle room on prices before they start to alienate their core customers.

We should also note that for all the positives mentioned, there are still some key challenges for the entire industry. Inflation is a headwind as costs and wages rise, while at the same time consumers have less disposable income. That makes for a tough backdrop when Covid-19 scares continue to impact footfall in physical stores.

As has been the case for the last couple of years, discounting and offering a strong online service are key. Those are trends we don’t see going away anytime soon. Slapping the sales stickers on and ramping up online operations both have the potential to eat away at margins if volumes don’t keep pace.

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Supermarket sweep?

The supermarket sector is fiercely competitive, keeping and gaining market share is an ongoing tug of war. The introduction of ultra-value chains like Lidl and Aldi put huge pricing pressure on the more established names. Aldi’s just had its best year to date.

Offering lower prices is an attractive place to be when inflation’s high. When customers’ paycheques aren’t stretching as far, they’re more likely to look for value. So, all in, grocery strategies have needed a shake up, discounting budgets have had to increase and the fight to offer the best value is at centre stage.

Tesco also managed to post impressive numbers over the third quarter plus Christmas period. Sales, excluding fuel and at constant exchange rates, rose 3.3% as the group gained market share in the UK Retail space. Tesco’s market leading position and clout with suppliers meant it’s been able to keep pace with demand and avoid any major disruption caused by supply chain issues too.

The group’s also invested in its value-perception, reducing prices has helped it stay up to date with a price sensitive consumer base. In fact, it’s directly taking on Aldi with its “Aldi Price Match” campaign.

It’s been a similar story for Sainsbury’s, who also posted better than expected trading over the period. It’s proved a worthwhile move to target a more specific market, sliding down the value chain and investing heavily in reducing prices. Grocery sales benefited from the ‘Aldi Price Match Christmas dinner’ campaign, with over 2,000 lines added to the ‘Price Lock Promise'. Unlike Tesco and Aldi, the group couldn’t beat last year’s bumper performance though, Grocery sales over a two-year period were up 6.6% – but it’s looking like hard work.

General Merchandise sales remain subdued, and while current events including supply chain disruption are partly to blame, there are structural declines in some markets. Sainsbury's is more exposed than others thanks to the acquisition of Argos, where sales fell 16.1% in the quarter.

Overall, supermarkets came out of the Christmas period in good shape. Anyone able to beat last year’s numbers did an impressive job, when eating in was the new norm. Inflation’s coming in hot though, so don’t expect any let up for these groups over the coming year.

View the latest Tesco share price and how to deal

View the latest Sainsbury share price and how to deal

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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