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Retailers still in for bumpy ride

Retailers are reported to have enjoyed a bumper July, but does that mean things are looking up on the high street?
August 15, 2014

Summer has been kind to the UK's high street retailers. The hot weather means shops have seen their garments fly off the shelves, and many have avoided heavy discounting. Most have also cleared sales lines and started to introduce their Autumn/Winter ranges.

Even home categories picked up in July. Furniture reported its highest growth rate since January, and home accessories, household textiles and even furniture sold well. Overall, UK retail sales were up 1.3 per cent in the three months to July, while non-food sales grew 3.4 per cent, according to figures from the British Retail Consortium. "That's against tough comparatives that included a heatwave, royal baby and a British Wimbledon champion," points out BRC director General Helen Dickinson.

It would appear, then, that there's reason to be upbeat about the outlook. Following seven months in which the average share price in the sector has fallen by roughly 4 per cent - as retailers were unable to offer the kind of earnings growth required to justify their lofty ratings - could the tide now be turning? Analysts at Cantor Fitzgerald Europe think so. "We believe that there is now limited downside in the general retail sector after a marked correction started from April this year. Consumer confidence, in our view, is recovering and housing-related spending, in our view, should see a strong pick-up in September," says analyst Freddie George.

We're not so sure. While retailers will certainly have felt a pick-up in July, thanks partly to the weather, consumer confidence remains fragile. The frenzied growth in the property market between January and July this year - a key driver of spending - is likely to have boosted sales, but this is a temporary tailwind. With interest rate hikes just around the corner and much stricter lending criteria making it difficult for people to get mortgages, the property market is pausing for breath. Anecdotal evidence suggests the market has already calmed down and prices are stabilising. And while the economy might be growing, productivity is still lagging behind and wage growth is negligible. Moreover, Russia continues its sabre rattling in relation to the Ukraine, Europe is in deflation, many banks are still basically bust and will require bail-outs and Iraq is once again a disaster zone. Accordingly, we don't expect the autumn results season to show a major jump in sales across the board. Rather, a smaller boost on the back of the house price boom and the warm weather.

Perhaps the more interesting snippet from the BRC data was the marked contrast in performance between food and non-food sales. Food sales were the worst performing category, down by roughly 3.5 per cent in July and by 1.4 per cent over the last quarter - the deepest three-month average decline since records began in December 2008. The sector is in turmoil as it competes on price with hardline discounters in a bid to win back shoppers. Morrisons' (MRW) well-document troubles are worsening and Tesco (TSCO) has been hit particularly hard, too. The general consensus is that Tesco's new chief executive will 'kitchen sink' or rebase profits, just like Justin King did when he took over at Sainsbury's (SBRY) years ago. Sure, the supermarkets potentially offer an attractive contrarian value opportunity, but investors who buy into that view could be waiting a while for a re-rating.