Christmas might feel like a long time ago, but we’re only just getting to hear what this important period meant for retailers.
The festive season is always an important time of year for the UK’s shops. It’s a period that can make or break the entire year for some businesses. Leading up to Christmas last year, the stakes were even higher than usual.
Sky-high inflation meant shoppers had less money to spend and shops were dealing with soaring costs themselves. That’s a potent, and very unhelpful, cocktail.
Some areas of retail held up much better than we feared. But there are still some big challenges.
There can be opportunity in bad times. But keep in mind, when a sector or company is downtrodden, it’s not guaranteed to get back up to old heights, it could even fall further.
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Which area faces an uphill battle?
People have spent less on non-essentials. Electrical specialist Currys, saw revenue in the peak trading period fall 6% on a like-for-like basis. That reflected declines in both the UK and Ireland, and international business segments.
Declines are understandable. In difficult times, buying a new vacuum or laptop can wait.
The tough part for Currys is its operating margins are thin, expected to be just 1% for the full year. The drop in revenue saw profits more than halve at the half year. That was made worse by the fact the group had to heavily discount its products to keep up with rivals.
This idea of non-essentials, also known as ‘discretionary’ items, falling out of favour, made us nervous to see how Sainsburys fared.
The supermarket giant owns Argos, which gives it extra exposure to general merchandise (GM) compared to other grocers. But Sainsburys’ GM sales rose 4.5% over the 16 weeks to early Jan, because of a good performance from Argos over Christmas. This was a welcome surprise, but those positive numbers mask some ongoing challenges.
Like Currys, Argos still had to offer discounts to entice customers. It also benefitted from Royal Mail strikes, as people looked for different ways to get their hands on gifts.
The more reliable and convenient offering Argos provides could be a source of repeat custom in the future. But for now we fear customers will go back to their old shopping habits. That will make the last set of results a very tough comparison further down the line.
The key thing to remember with stocks that offer discretionary items is that the road ahead looks uncomfortable, at least in the short term. Discounting as a way to keep hold of market share is not a sustainable solution. There are plenty of high-quality companies that offer non-essential goods and services, but it’s important to keep in mind that for now, they’re unlikely to thrive.
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Fashion faux-pas?
We all know the story by now – bricks and mortar fashion retailers are doomed. Or are they?
Marks & Spencer (M&S) pulled off an impressive turnaround where its Clothing & Home business is concerned. Third quarter sales in the division rose almost 9% to £1.2bn, with huge strides in click and collect and online orders. This is no small achievement. M&S has had its fair share of transformation efforts and it’s finally paying off.
The group’s confidence is clear when you consider plans to open 20 more M&S shops, with eight being full line stores – meaning there will be clothing and food departments.
Choosing to open so much physical shopping space is a bold move – we’d like a bit more detail on the fine print, like lease terms, before getting too enthusiastic. But overall, M&S clothing shows that high street retail is still alive and kicking.
A big fashion name that didn’t have such a good run this Christmas was online giant, ASOS. Sales slumped 8% in its most important region – the UK. While some of this was because of the Royal Mail disruption, it can’t all be put down to that.
Competition, and reduced customer spending were also themes. ASOS was starting from a higher base than M&S, so it’s not fair to directly compare. However, it does show that even the more nimble names in industry aren’t immune from current challenges.
It’s likely that ASOS’ main customers are more inclined to use the site for party dresses or ‘fun’ clothes, whereas M&S clothes have more of a reputation for offering essentials.
The main thing we’ve learnt so far about fashion retail this Christmas is it’s wrong to judge a stock by its cover. Just because a company sounds like it should perform better than its competitors, doesn’t mean it will.
Digging into the specifics of how a company makes it money, and who it relies on as customers is always important before deciding to invest.
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Prosperity at the end of the aisle?
Compared to other areas of retail, the grocers held up fairly well. This is to be expected. We all need to put dinner on the table regardless of how tight our budgets are. For that reason, supermarkets can offer a bit more resilience. A certain amount of revenue is guaranteed. But that doesn’t mean all names in the sector are created equal.
Tesco posted strong results over the Christmas season. Sales were up almost 8% in its core UK and Ireland markets, and the supermarket continues to have a dominant market share. The group's wholesale business, Booker, saw sales rise 10%. This reflected double-digit growth in catering, which was partly driven by price freezes for customers.
While all of this is positive, the group’s enticing customers through promotions like Aldi Price Match. That's being helped by Tesco's enormous scale.
The mature, deeply rooted, nature of its relationships with suppliers have been a key tool in allowing Tesco to keep its prices down. In turn, this helped it perform well, despite the growth of the discount retailers like Aldi and Lidl.
Ultimately, we can’t knock progress, but it’s important to keep an eye on margins. The cost-of-living crisis has reignited a price war. This risks undoing a lot of the good work Tesco’s put in to rebuild profitability since the last race to the bottom on prices a few years ago.
It’s a slightly different kettle of fish over at M&S food.
This is the group’s biggest division and it outperformed the market in both volume and value during the critical Christmas period. This saw its Food division grow sales by 10.2% over the period.
Boosting volumes despite M&S’ higher price point is a big achievement. This suggests that M&S’ core customers aren’t as badly affected by rising prices, which is a real strength.
From here, it will be crucial to monitor demand though. There’s a chance people went all out at M&S for Christmas, and could now be pulling back. Overall, we think M&S food is in a good position. Remember though, nothing’s guaranteed.
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