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Christmas cheer and fear for retailers

There Yuletide season was decidedly mixed on the UK's high street
January 15, 2015

Retail has been rather a mixed bag this Christmas season. Soggy sales growth and heavy discounting caused misery for some, while others enjoyed a buoyant Yuletide. Here's a round-up of what we've seen so far.

IC TIP: Hold at 830p

Boohoo (BOO: 25.5p) issued a massive profit warning after sales growth fell hugely short of expectations, sending the shares down by nearly one-third. The scale of the downgrade certainly raises questions over the quality of management's guidance. Sell. Marks & Spencer (MKS: 451p) failed to impress, too. General merchandise sales, seen as key to the retailer's recovery, slumped by nearly 6 per cent on a like-for-like basis in the 13 weeks to 27 December. Online sales also fell - 6 per cent - which management attributed to disruption at its distribution centre. We keep the shares on a sell. Majestic Wine (MJW: 330p) reported 1 per cent like-for-like sales growth in the 10 weeks to 5 January, but warned that it had to cut prices to compete in a cut-throat market, leading analysts to downgrade full-year profit forecasts by as much as 6 per cent. We move the shares off our buy list to a hold until we see more clarity on the growth strategy. Game Digital (GMD: 241p) issued a shock profit warning, sending the shares down by one-third. Due to heavy discounting total sales fell by 5.4 per cent over the last 11 weeks, despite a 25 per cent rise in hardware sales volumes. Underlying cash profits for the full year will be in line with last year's £51.3m, against hopes of £65m. Chief executive Martyn Gibbs said the strategy to reduce pricing over Christmas was aimed at recruiting as many new customers as quickly as possible. But the news is extremely disappointing, given the positive trading update issued in mid-November and steady strengthening of the share price. Furthermore, the Christmas trading figures were released at 5.09pm on Tuesday, a poor attempt to bury the news. Cut your losses. We downgrade to sell.

Halfords (HFD: 430p) has yet to unveil its Christmas trading figures, but news that chief executive Matt Davies had defected to head up Tesco's UK business put a dampener on the shares. Mr Davies has been instrumental in driving the recovery programme. Management change is always risky, but the valuation is undemanding and the foundations for the recovery are already in place. Accordingly, we're leaving the shares on a buy. Department store Debenhams' (DEB: 71p) share price has been creeping up since hitting a low in October. But investors were clearly not convinced by the retailer's Christmas trading update, despite it being significantly better than that of M&S and in our view, reassuring, as full-year profit guidance remained unchanged (albeit guided to the lower end of forecasts). Peak Christmas trading was strong, with like-for-like sales running 5 per cent ahead in the month to 10 January. Encouragingly, there was less promotional activity and strong online sales growth, helped by wider delivery options. The shares remain a hold.

Moving upmarket, Ted Baker (TED: 2,290p) appeared immune to the problems of the wider high street. Sales rose 23 per cent in the eight weeks to 3 January, while average retail space rose 9.2 per cent. Online sales soared 66 per cent, reflecting a strong UK and US performance. Gross margins were in line with expectations and trading since Christmas is reported to have been especially robust. The shares remain a buy. Asos's (ASC: 2,655p) Christmas trading statement was in line with expectations, a relief to the City following the catastrophe at Boohoo. The UK enjoyed a solid performance, which lifted the shares up 8 per cent on the day. However, we leave this highly rated and volatile stock on a hold.

Other notable outperformers were non-clothing retailers. Homewares company Dunelm (DNLM: 830p) enjoyed a particularly strong half year to 27 December. Total sales were up 14 per cent with 3.5 per cent like-for-like growth, excluding online home delivery. The group is expanding and a focus on e-commerce boosted home delivery sales by 70 per cent. Pre-tax profit guidance for the full year is unchanged, as outperformance in the top line is being offset by higher costs as Dunelm invests in growth. The stock remains on our buy list. Topps Tiles (TPT: 116p) also unveiled a bullish trading update, although Christmas isn't exactly a boom time for the tile merchant. First-quarter same-store sales were up 6 per cent against tough comparatives. Finally, shares in baker turned food-on-the-go seller Greggs (GRG: 817p) rose 8 per cent as it revealed bumper Christmas trading and a strong finish to the year. Own-shop like-for-like sales are expected to end the year 4.5 per cent higher - the best outcome since 2007. It appears Greggs' focus on the food-to-go market is paying off. The shares have been ticking up since the autumn and we admit our sell advice was badly timed. But, given that the shares are now trading on a very full 19 times forward earnings, the rating leaves little room for error. Investors who have enjoyed a nearly 60 per cent rise since July would do well to take profits now. We move to a hold. Burberry's (BRBY: 1,642p) third-quarter trading update was as expected. Comparable retail sales rose 8 per cent, while more favourable exchange rate movements offset a slowdown in Hong Kong, leaving full-year forecasts - and our hold recommendation - unchanged. Finally, SuperGroup (SGP: 896p) announced its Christmas trading outcome earlier than forecast. At first, this sent alarm bells ringing. But, to our relief, the result was positive. The group performed strongly over Christmas, reporting 12 per cent like-for-like retail sales growth. Online was a particularly good performer and the cold post-Boxing Day weather drove sales of core outerwear and knitwear. Management has retained its full-year profit guidance of £60m to £65m. Still a buy.