- Consumer confidence increase
- Collection of guidance upgrades
The rollercoaster of consumer confidence surveys has continued, with a positive update this month driven by inflation dropping and wage growth. Similarly, the outlook for the retail sector is decidedly mixed as shoppers hunt for bargains and look for ways to cut costs this Christmas.
November updates from some key blue-chip players have raised sector hopes. Marks & Spencer's (MKS) interim trading surged ahead of consensus forecasts and it has reinstated its dividend. Next (NXT) and discounter B&M European Value Retail (BME) both upgraded their full-year guidance.
Lower down the market totem pole, meanwhile, electrical retailer AO World (AO.) and Mr Kipling maker Premier Foods (PFD) also bumped up profit guidance.
Deutsche Bank analysts said this could be the high point for the sector. "We don't believe it will be possible to count on the same degree of sales and margin surprises across the sector in 2024.” They argued that “a decent set of Christmas trading prints in January will likely be the last hurrah for the sector in relative terms”.
The bank's own research pointed to M&S's comeback continuing, while its analysts say Next may struggle to hold shoppers' attention.
"In terms of spending intentions, Shein, Primark and Zara remain at the top, but with M&S seeing the most improvement, whilst Next has taken a step back," the analyst team said. They are down on Next because of its "mass-market", higher-margin focus, meaning it is more exposed to shoppers considering cost-of-living pressures.
Busy elves
But the sector overall received an early Christmas present last week as GfK’s closely watched UK consumer confidence index rose by six points in November. While the score is still negative 24, there were improvements across all metrics, including confidence about personal finances over the next year. The index has bounced between negative 30 and negative 24-27 since April.
GfK client strategy director Joe Staton said the data “will be good news for retailers looking to benefit from Black Friday and Christmas”. He added that “despite cost-of-living pressures, many would still like to loosen their purse strings”.
But KPMG is less optimistic, with its surveys suggesting that four in 10 UK consumers will cut spending this Christmas, and separately three out of 10 "spending more time now searching for the best-priced goods". Peer EY said that millennials are cutting back more than older demographics. "With inflation, high rents and increased mortgages impacting younger age groups, these shoppers are being more cautious with spending," said Silvia Rindone from EY.
While wage growth and resilient employment levels will be key supports for retail spending in 2024, significant challenges are set to impact trading. Falling inflation gives companies less justification for price rises, there are fewer obvious margin tailwinds, and there is still a big chunk of mortgage holders set to roll onto significantly more expensive deals.
This means that investors need to pick their sector holdings wisely. Our top retailer pick is the expanding B&M European Value Retail, with its margins and discount model performing well in this tough market environment. The shares trade hands at 14 times consensus forward earnings, below the five-year averages. Notable progress is also being made at Marks & Spencer and Next.
