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Retailers short on Christmas cheer

Created:
20 December 2007
Written by:
Amanda Vermeulen

Retailers hoping for a last-minute Christmas rush are likely to suffer further misery, with analysts increasingly predicting that trading up to and around the festive period did not match last year.

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Matthew McEachran, analyst at Kaupthing, says Christmas will be a particularly nail-biting ride, even though this year’s timing of the festive season is more favourable to retailers than 2006 was. The biggest factor will be credit availability. “The appetite [to shop] seems to be there, but whether it can be converted into actual spending remains to be seen.” Mr McEachran also expects 2008 to be worse than 2007, with sales growth potentially moving into negative territory, considering relatively strong comparatives in the first half.

A slew of profit warnings littered the non-food retail landscape in the second half of 2007. Over the year, the sector underperformed the FTSE All-Share Index by around 25 per cent. According to the CBI's distributive trades survey, 42 per cent of firms reported sales volume growth in the first half of December, while 33 per cent said they had fallen.

Seymour Pierce says few retailers stayed in positive territory in the six weeks to Christmas: “The BDO Like-4-Like Club reported fashion like-for-likes in negative territory every week since mid-October.”

Dismal performances have been blamed on tightening credit markets and higher interest rates. The most immediate impact has come from a slowdown in house price growth - which has affected big-ticket household items. Seymour Pierce has maintained an 'underweight' view on the sector, with fashion retailers, big-ticket retailers, and commodity-type gift retailers like such as Woolworths and Home Retail likely to suffer most. While a further interest rate cut is expected in the near future, Citi Investment Research says it will not have much impact before 2009.

Companies threatening to miss profit forecasts include French Connection, Alexon, Moss Bros, Signet, ScS, DSG, and Umbro. Sports Direct managed to surprise the market with a first-half profit slump of 73 per cent, which was less than expected. Seymour Pierce expects to see pressure on the mid-market clothing retailers and sees the likes of Next and Debenhams as ones to avoid.

Online and home shopping retailers have bucked the trend. Seymour Pierce suggests that they should be re-rated in the New Year. Other glimmers of light are coming from parts of the entertainment market after a surge in gaming and console sales.

IC VIEW:

HighEnough

The consensus view in the City is that conditions for the retailers will get worse before they get better. Companies exposed to the housing market will remain under pressure and profit warnings from fashion retailers are road signs not to be ignored, so the likes Next, at 1,617p and Debenhams, at 80p, are high enough. Investors should await the forthcoming slew of Christmas trading statements before making any bold moves in retail.

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