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It's hard to tally the spectacular May retail sales data from the Office of National Statistics (ONS) with worrying news from certain listed, high-street players. ONS data for May showed the biggest increase since records began in 1986. But before holders of shares in the general retail sector were able to luxuriate in the thought that maybe the market had spent a year panicking over nothing, several companies justified their share price slides with truly horrible announcements.
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On the very same day, Land of Leather told shareholders it was a case of do or die, saying that if it did not get support for its £15m rights issues it was "unlikely to be able to continue to trade in its current form". And rival furniture retailer ScS Upholstery has since had its shares suspended while it mulls a takeover deal that would remedy its dire financial position, but leave shareholders with "negligible" value.
But consumers tend to be quick to shun big, expensive purchases when economic worries are elevated, so it’s no surprise that furniture retailers have been hard hit. And it's not all grim news in the sector. The suggestion from the ONS data that the pain may not be spreading was supported by positive trading from luxury retailer Mulberry. And sector pariah, Debenhams, issued an impromptu, positive trading statement to shore up its bombed-out shares.
However, the broader picture and general direction of the economy provide less room for optimism. Indeed, unlisted retailer John Lewis, seen by many as something of a bellweather, has reported sales falls in five of the last six week, although fashion sales are holding up pretty well. So investors are likely to continue focusing on avoiding or shorting the most vulnerable-looking retailers while paying little heed to recovery potential.
High debt and a reliance on big ticket sales are two particular weaknesses in the current climate, which is why shares in DSG International and Debenhams are suffering. Unless there is an run of irrefutably good news, the reaction to the ONS data suggests we can expect strength in retail sales to be interpreted as a sign that the consumer malaise has further to spread - rather than as indication of resilience.
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
