Prior to Christmas we suggested the state of UK retail would start to look pretty ugly around March. Those comments were made in the context of Black Friday, when several headlines were hailing the resilience of UK retail sales. But, right on cue, as the festive sheen wears off and the reality of stagnant wage growth and rising price inflation sets in, several retailers are finding it difficult to convince customers to part with their cash.
As our recent feature pointed out, retailers with a large presence on the high street stand to lose the most, as shoppers head online in the pursuit of better prices and convenient delivery options. This shift in shopping behaviour has left many traditional high street shops empty, as recent footfall data shows. Perhaps it’s no surprise, then, that some of these companies are sounding the alarm.
One such company in peril is flooring specialist Carpetright (CPR). The group said it would be forced to report an underlying loss for the year ending April 2018, following a deterioration in market conditions since its last trading update at the end of January. Even worse, the company is in “constructive” discussions with lenders to make sure it “continues to comply with the terms of its prevailing bank facilities”. The board is also said to be considering its options for accelerating a turnaround of the business and strengthening the balance sheet. That could mean any number of things, including selling the business, attempting a fundraising or shutting up shop altogether. Unsurprisingly, the shares fell roughly 30 per cent by way of reaction on the day of the news.
Carpetright isn’t alone. A seemingly unprompted 7 per cent fall in Mothercare’s (MTC) share price piqued the interest of investors, even though the stock is already down more than two-thirds over the last 12 months. As such, Mothercare was compelled to admit that adjusted pre-tax profit would be at the lower end of its £1m-£5m guided range and that the more challenging trading environment had prompted it to discuss funding needs for 2019 and beyond with its financing partners. Consequentially, the share price fall worsened to 16 per cent, taking the stock down more than 80 per cent over the last 12 months.
Unless these two groups embark on a serious rescue mission, we could be looking at two high-profile retail collapses. But neither would be the first to fall in 2018. US group Toys ‘R’ Us and UK electricals retailer Maplin both announced administrations in recent weeks. The reasons cited for their demise by analysts include overexpansion during the days of cheap credit, a preference for online shopping, and a fall in real wages. The lack of spare cash in these businesses meant stores looked tired, and a lack of staff training or incentives meant it was hard to attract a dedicated and enthusiastic workforce. In fact, some suggest these groups have fallen victim to a shift in the wider job market. As younger generations become better qualified because of wider access to higher education, the impulse is to move to larger towns and cities in search of worthy employment.
Other groups thought to be in the danger zone include Debenhams (DEB) and privately owned House of Fraser. The former is highly overleveraged when it comes to its property portfolio, as our recent feature showed, with Carpetright a close second and Mothercare in fourth. Suffice to say, Debenhams did not get off to a good start in 2018: the group issued a 35 per cent profit downgrade in January, after revealing a difficult Christmas trading period, characterised by heavy discounting and a squeeze in gross margins. Results are due on 19 April, but we hardly expect these to be inspiring.
