FTSE 350: Mixed festive trading highlights high-street retail challenge

For those retailers who have already made online investments, the festive trading period was generally strong, and offers some comfort for a difficult year ahead. But even those who have been slow to adapt could finally be getting their act together.

Take high street stalwart Marks and Spencer (MKS). The company was a permanent fixture in the business press headlines in 2018, as speculation swirled about the retail chain's future as stores were closed, and a raft of high-profile management appointments were made to steady the ship. Amid the turmoil, chairman Archie Norman used last summer's annual meeting to warn investors that there would be no “quick fix” for M&S’s current woes, and that financial results for “the next two years” were “not the most important thing”. In other words, shareholders should realise that turning around a juggernaut like M&S requires time – and plenty of patience.

Whether the market is willing to lend M&S's managers this time and patience remains to be seen, but a Christmas trading update from the chain did go over better than expected. Not that the numbers were pretty: total UK sales fell 2.2 per cent, reflecting a 2.1 per cent contraction in food sales and a 2.4 per cent drop in clothing and home sales. But analysts at Shore Capital praised the performance against what remains a difficult retail market, and it’s likely the market was just relieved not to see a profit warning. For now, full-year guidance remains unchanged, while Shore Capital reckons the "transformation programme, which now has most of the main management characters in place, is on track".

Unchanged annual guidance suggests that, like many other retailers, M&S enjoyed a rally in trading in the immediate run-up to Christmas, despite a sluggish start to the quarter. November was one of the worst months of trading for the sector, summarised by Sports Direct owner Mike Ashley, who said retailers faced being “smashed to pieces” as consumers tightened the purse strings ahead of Christmas. Those comments, coupled with the slim 0.4 per cent rise in the quantity of retail sales in the three months to November, led many to believe this would be a Christmas to forget.

But perhaps that fear was overdone, which investors will hope could herald some relief in 2019. After sluggish trading in the run-up to Christmas, the 22 December weekend delivered a last-minute turnaround in retailers’ fortunes. As such, total UK retail sales in December ended up flat year on year, but that disguises what many retailers cited as an improving trend in sales growth towards the very end of 2018. That this has continued into the new year is worth contrasting with a report from the BRC-KPMG Retail Sales Monitor, which declared 2018 the “worst Christmas for retail since 2008”. Near-full employment and rising real living standards colours that as an overly pessimistic view.

There have, of course, been early casualties. Halfords (HFD) started the year with a profit warning, while Card Factory (CARD) said it expects another difficult year as rising costs compound a disappointing Christmas. But homewares retailer Dunelm (DNLM) surprised the market when it revealed a solid 5.7 per cent improvement in like-for-like store sales over the 13-week period ended 29 December, taking the overall underlying growth rate up to 9 per cent. HR