What to make of the three Ds?

Taking Stock

What to make of the three Ds?

Who can be trusted to give a prognosis for the retail sector? Company managers, you'd think: they have nothing to gain in the long term from gilding the lily. But some investors suspect they prefer broad comments on the 'health of the UK consumer' than to admit product deficiencies.

Is this fair? Last month's trio of bad trading updates for the listed retailers started with DFS (DFS) citing "significant declines" in footfall materially weakening orders. The statement went on: "We believe these demand effects are market-wide, in line with industry indicators, and are linked to customer uncertainty regarding the general election and the uncertain macroeconomic environment."

This statement was compounded by industry data reported by the Office for National Statistics, showing year-on-year volumes up 0.9 per cent in May 2017, the weakest performance in four years. Share prices headed lower.

Reacting to monthly data can send an investor on a hiding to nothing. But then we received Debenhams' (DEB) half-year trading update. "As industry data has confirmed, May was a tough month for retailers and we continue to see volatility in trading week to week," said chief executive Sergio Bucher. Constant-currency comparable sales were down 2.4 per cent over the 15 weeks to 17 June.

Bears were finding justification, until Dixons Carphone (DC.) managed to avoid becoming the 'third D' in its half-year numbers - a point made by analysts at Canaccord Genuity. "The UK consumer environment seems to be holding up for us," said group chief executive Seb James, a comment that could have been accompanied by a knowing smile.

Instead, JD Sports (JD.) - perhaps therein is the third 'D' - took a dive after warning of margin pressure in achieving sales growth, and timing impacts on like-for-like sales. Still, growth in the top line did keep up with expectations; not enough, perhaps, for investors used to earnings upgrades. Elsewhere, N Brown (BWNG) was happy to take the credit for a strong first quarter: "Although the outlook for consumer confidence remains uncertain, our offering is resonating with customers," said chief executive Angela Spindler. At the affordable end of the general retail sector, B&M European Value Retail (BME) is performing well: management also said its offer "resonates well".

Do those running the three Ds simply need to work on their resonance? The market's mood music is certainly bad. Excluding grocers, there are three retailers in the top 10 most shorted stocks on the London market: Debenhams, Marks and Spencer (MKS) and Pets at Home (PETS). Admittedly, there's another backdrop to that, which we have covered aplenty: disruption, noted by Dixons' bosses as a caveat to their solid top-line growth.

How about the scuttlebutt method? Last month, analysts at Stifel headed on foot to the Westfield Stratford shopping centre in east London to compare the shopping experience at the clothing retailers, and the amount of discounting on offer: for them, M&S beat Next (NXT) on customer service, while the UK retailers in general were sticking more closely to their full-price strategies than overseas rivals.

By the time this article reaches you there may be further monthly data on the sector from the British Retail Consortium (BRC) and KPMG. The BRC's chief, Helen Dickinson, said the rough May was "indicative of a longer-term trend of a decline in consumer spending power", fed by the inflation squeeze. Maybe this will be a stuttering effect, and some managers will cite it more than others, but the trend seems fairly clearly negative for non-food retail.

Investors calling management's bluff on the macro stuff are taking a risk themselves. The nature of a downturn means that you are in it before you know it. Those at fund manager Neil Woodford's eponymous investment house are much more positive on the big picture, standing against the 'buy exporters, sell importers' consensus. "We believe the outlook for the UK economy is improving," said a recent note.

On a price/earnings basis, the market is giving shortest shrift to motor retailers, followed by electrical retailers and middle-market clothing and general goods, then food, then the global luxury stocks. It's hard to say where that collective judgment looks wobbly.

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