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So far, so good - or at least, not as bad as expected. Retailers that have revealed their Christmas trading figures have mostly had something positive to say, and there have been no genuine shockers yet.
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Next, which didn't extensively discount its products during the festive season, said its Christmas trading was within expectations and that it will reach its full year profit target. Debenhams, saddled by a huge debt of about £900m, said it had enough money to service a £100m loan due in April. It’s Christmas sales were down, but not as badly as analysts had envisaged.
Marks & Spencer managed to avoid a profit warning, and while job losses hogged the headlines, UK sales were better than the market had expected.
Smaller retailers showed mixed results. Blacks Leisure issued a profit warning, along with higher than expected sales declines, but budget baker Greggs reported a 5.3 per cent rise in like-for-like sales for the four weeks to January 3.
The trading news follows a series of retail failures, and this has led some commentators to start talking the sector up. The basis for such optimism is that the removal of weaker operators eliminates competition and shrinks supply, helping better-run outfits grab more market share and preserve their margins.
However, better-run retailers are not entirely immune to challenges brought about by the economic downturn. Marks & Spencer, for example, revealed that heavy discounting during the festive season had hit profit margins. It now expects its gross margins to be 1.7 per centage points lower than the previous year, and even though it is cutting costs by closing stores and reducing staff numbers, its margin erosion is likely to continue alongside weakening sales. That in turn puts the bellwether retailer's all-important dividend in jeopardy.
Debenhams, meanwhile, still needs to raise cash, given its unwieldy capital structure, and may need to convince its lenders to relax some of its banking covenants. And while Next has escaped relatively unscathed so far, it will also face margin erosion due to the effect of the weaker pound on imported products.
There's pretty universal consensus that the sector is facing its toughest time ever, made worse by the belief that the recession will last longer than expected. For the time being, we remain negative on the sector as a whole and sellers of Next, Debenhams and Marks and Spencer in particular.
See also To Let: 11 Bluewaters and Is retail poised for recovery?
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