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All change on the UK high street

Retailers are fighting to stay afloat due to changing consumer habits and tighter spending
May 17, 2018

It’s been a busy week in UK retail, with updates from baker Greggs (GRG), Next (NXT) and Superdry (SDRY). The British Retail Consortium (BRC) and KPMG retail figures also revealed a 4.2 per cent drop in like-for-like retail sales during the month of April – the sharpest fall in more than two decades for that month. This put some company announcements in context but, for investors, it should make identifying the winners and losers from the sector easier.

Let’s start with the surprise profit warning from Greggs. It’s been a year chock-full of warnings from the retail sector, but as Greggs continues to invest in logistics and central bakery facilities, a sudden earnings shortfall didn’t seem likely. Indeed, the BRC confirmed that spending on non-food items was the hardest hit during April, suggesting the food and grocery sector actually held up better than expected. But Greggs says several factors are to blame: lower footfall numbers on the high street, the early timing of Easter and the freak snow storm dubbed the 'Beast from the East', which hit the UK in March.

So how do you explain the quarterly update from clothing chain Next, which was good enough to push the shares up on the day of its release? The answer appears to be focusing on online, full-price sales. Like Greggs, Next also saw fewer in-store visits, resulting in a 4.8 per cent decline in retail sales during the first quarter. But online sales soared by 18 per cent, mainly driven by the popularity of Next own-brand stock and third-party brands in the UK, along with continued growth overseas. This helped lift overall full-price brand sales by 6 per cent, with management raising profit guidance for the current financial year from £705m to £717m – assuming total full-price sales rise by about 2.2 per cent this year.

Could it simply be a matter of timing? Unlikely. Next’s trading period ran up until 7 May, which included a sunnier April compared with a chilly March. Superdry’s fourth quarter ran until 28 April, but the shares still fell sharply after the group revealed underlying full-year pre-tax profits would land somewhere between £96.5m and £97.5m – below company-compiled consensus of £98.9m. In management’s own words, store-based sales remain “under pressure” – a common thread between Greggs, Next and Superdry despite their distinctly different customer bases. But adding to this pressure is Superdry’s expanding wholesale business, which is diluting margins, while planned inventory reduction and clearance activity is taking a further bite out of the bottom line.  

Elsewhere, arguably, at the bottom of the food chain sits beleaguered floorings specialist Carpetright (CPR). The group recently announced plans to enter into a Company Voluntary Agreement (CVA), which will allow it to address its short-term funding issues and exit long property leases. This week the group confirmed its largest shareholder had agreed to plug a £15m funding gap, while lenders had collectively decided to extend the group’s revolving credit facility until December 2019. The group also confirmed plans to proceed with a £60m share placing. But the shares fell on the day of this news, suggesting confidence over the group’s future remains low.

Carpetright isn’t alone in this strategy. Fashion chain New Look announced plans for a CVA in March, while House of Fraser’s £70m cash injection from Hong Kong-listed C.banner International is dependent on the group pursuing a CVA to cut down on store numbers. Even restaurants aren’t immune: brands such as Byron and Jamie’s Italian have also used CVA arrangements to close sites. Mothercare (MTC) also confirmed that it was finalising restructuring plans alongside new committed debt facilities, an underwritten equity issue and access to other sources of capital.