How retailers performed over Christmas

It has been an eventful year for retailers – and we’re not even halfway through January yet. Next (NXT) has repeated its usual trick and pushed up guidance, while sportswear specialist JD Sports Fashion (JD.) overestimated demand for the latest Nike gear and has cut its own forecasts for the 12 months to 3 February. Analysts are striking an optimistic note: “Consumer confidence is increasing, headline inflation is falling, and consumer disposable income... is increasing,” said Panmure Gordon’s Alex Chatterton and Georgia Pettman.

Discount chain B&M European Value Retail (BME) had a decent run-up to Christmas, with UK like-for-like sales edging up by 1.2 per cent in the 14 weeks to 30 December. UK sales were up almost 4 per cent while France – a smaller market – saw an 11 per cent increase in the period. Management has reiterated its full-year guidance as a result, and issued a special dividend of 20p per share.

Last week, Next raised its forecasts for the fifth time in eight months and now expects to achieve a pre-tax profit of £905mn – 4 per cent higher than last year. Consumer demand has proved surprisingly robust, with full-price sales rising by 5.7 per cent in the nine weeks to 30 December, and the group has significantly less surplus stock to flog than it did last January.

Investors were duly impressed, and the shares rose by 6 per cent after the update was published.

JD Sports had a very different December. Its shares tumbled by 28 per cent last week after it cut its full-year pre-tax profit guidance from over £1bn to between £915mn and £935mn. Organic sales growth was solid at 6 per cent, but management said milder weather and consumer caution had dented demand. An abundance of promotional activity across the sector also hit JD Sports’ gross margin, which is now expected to be “slightly” lower than it was last year.

The period was also a mixed bag at J Sainsbury (SBRY), where non-food sales struggled against tough comparators. Total general merchadise revenue – which includes contributions from Argos – fell by 3.7 per cent in the Christmas period, and clothing sales by 6 per cent. Fashion was also troublesome at JD Sports.

The variety of trading updates coming out this month presents a conundrum for investors. After performing better than expected over Christmas 2022 and much of 2023, is the listed retail sector finally coming unstuck? Or are companies through the worst?

Analyst outlook

The mood among analysts is fairly cheerful. The likes of Shore Capital and Panmure Gordon have voiced “cautious optimism” based on lower inflation and improving consumer confidence. Food inflation reached 20 per cent in early 2023, but has now retreated to under 5 per cent.

“The UK consumer faces 2024 with rising real living standards, high employment levels, stable house prices (albeit elevated rental inflation) and probably peak base rates,” Shore Capital said. “We continue to see this as a reasonable consumer macroeconomic backdrop even with lethargic GDP widely anticipated.”

Simon French, head of research at Panmure Gordon, added that Next is a “much purer read on the health of the UK consumer” than JD Sports, as it generates 85 per cent of its sales in the UK compared with JD’s 38 per cent.

There are some important caveats, of course. Tensions in the Red Sea are starting to disrupt supply chains and push up shipping costs. Meanwhile, the UK’s own economy is far from buoyant, and consumer confidence – although improved – is still in negative territory.

Wage inflation could also cause problems come April, when the national living wage will rise by roughly 10 per cent. This is expected to add £60mn onto Next’s cost base, but the company said higher wages could stimulate spending in its shops.

Against this backdrop, the characteristics of individual companies will be key. Interest rates in the UK may well have peaked, but Shore Capital is right to flag that “well financed consumer firms [remain] better set than the leveraged”. And when it comes to the retail sector, there are some huge discrepancies.

At online fast-fashion brand Asos (ASC), for example, net debt/Ebitda (excluding lease liabilities) sits at 2.6 times as per Panmure’s forecast, and interest cover is in negative territory. Boohoo (BOO) finds itself in a similar situation. In contrast, the likes of Pets at Home (PETS) have a net cash position when leases are excluded.

Takeover activity could also prove important this year, following Mars’ acquisition of Hotel Chocolat (HOTC). According to Panmure Gordon, motoring and cycling chain Halfords (HFD) tops the list of likely retail takeovers, following speculation that Redde Northgate (REDD) was interested.

Much of the market is still jumpy, selling heavily on negative news and only rewarding spectacular outperformance. For now, however, there appear grounds for optimism in the retail sector