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What to look out for in Retail this Christmas

Nicholas Hyett, Equity Analyst, looks at the challenges facing retailers in the run up to the most important time of year.

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 can make or break a retailer’s year. And with the high street feeling the pinch as footfall fades, this festive season could be even more significant than usual.

So, as we slide towards December, whose performance could be facing a chill, and why?

'Tis the season to shop online

More and more of us are doing our shopping online – slightly less than £1 in every £5 is now spent online. For old school retailers, that’s a problem.

Those that were slow off the mark shifting online are seeing sales struggle. Names like House of Fraser, Toys ‘R’ Us and Debenhams can all partly blame a failure to adapt to e-commerce for their woes.

The obvious online challenger is Amazon, especially at this time of year. One day delivery on everything from coffee machines to cat food, often at less than high street prices, is hard to compete with.

But not all retailers are having the same problems with online competition. Next in particular is seeing its online business thrive. Online sales rose 12.6% in the first half of the year, and accounted for half of the group total.

Its history as a catalogue company meant it had much of the infrastructure in place when online shopping took off, and it’s invested heavily since while also opening more high street stores. With around half of online sales completed through click & collect, Next’s an illustration of what a well-managed high street and online business can achieve when married together.

This article isn’t personal advice to buy, sell, or hold any investment. If you’re not sure if an investment is right for you, please get financial advice.

Average internet sales as a percentage of total retail sales in the UK

Scroll across to see the full chart.

Average percentage since 2009, up to Q3 2019

Source: ONS 17 October 2019

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Sales stickers aren’t good news for everyone

But online isn’t the only threat. Increasingly price sensitive consumers have sparked discounting both on and off the high street. The recent import of Black Friday means it’s a race to the bottom in the run up to Christmas.

Sales stickers aren’t new, but they’re bad news for margins. Debenhams was renowned for its Blue Cross sales before falling into administration. More recently ASOS has fallen foul of the discounting monster, which was one of the driving forces behind a string of profit warnings this year.

We suspect a lot of the pressure’s coming from throw-away fashion queen, It’s not uncommon for a boohoo dress to sell for £5 or less, and ASOS’ troubles suggest everyone is simply paying less for clothes everywhere.

We’ve already had full year results from ASOS, and although pre-tax profit of £33.1m was significantly down on last year, it was slightly better than analysts expected. But it was around this time last year the group issued its first profit warning, as the festive trading indicators flashed red. Last minute Black Friday sales could be important again this year.

Full year operating margins for Asos and Boohoo

Scroll across to see the full chart.

Source: Refinitiv Eikon 13 November 2019. *e - estimates.

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All I want for Christmas is lower costs

The sour cherry on the cake for retailers is rising costs. Wages have been increasing, and a weaker pound means many are having to pay more to import stock.

But the real ball and chain is rent. Current lease agreements for lots of high street names are too long and too expensive. For businesses seeing less footfall and lower margin sales, not being able to escape these contracts and shut unprofitable stores is a real problem. Even stalwart New Look had to enter into a review with its landlords this year. More recently Clintons is considering going cap in hand to its landlords.

But it’s the old school department stores that face the biggest problem. They find themselves running cavernous shops with decades left to run on their leases. Marks & Spencer know this dilemma too well – it’s thrown hundreds of millions and a dividend cut at its restructure and store closure plan.

Marks is in the unique position of having to capture fashion and food markets during the festive season. So far food has been the star performer, after sales beat the market at the half year. But, as ever there’s no guarantee this will continue.

Marks needs to shift an impressive amount of pigs in blankets to keep momentum going, but particularly at this time of year we think the group’s brand heritage could help get tills ringing. Perhaps more than most, this Christmas is key for M&S.

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And a happy New Year?

It’s not uncommon for retail profit warnings to come through in January, because if Christmas hasn’t gone to plan it’s a real dent on the full year.

But it’s not all doom and gloom. We still spend the majority of our money in physical shops, and that means there will be winners and losers this Christmas. Markets that can avoid direct price competition and haven’t yet been subject to the online revolution are potential winners. It’s just possible that the strength of M&S’s online business suggests the food retailers are worth a closer look.

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. 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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