The festive season has truly arrived with a vengeance and the retail sector depends on the seasonal shopping frenzy. Last weekend heralded the official launch of spending season, a four-day retail extravaganza beginning with Black Friday and culminating with Cyber Monday. UK retailers depend on its success.
Since Cyber Monday’s official US launch in 2005, online shopping has evolved beyond all recognition and is now an entirely different beast; a way of life rather than just a matter of convenience.
As the Amazon (AMZN) Effect casts a growing shadow across the traditional brick and mortar sector, the UK high street must continue to fight back.
There is undoubtedly no better place to start than one of the year’s biggest shopping weeks.
Research from VoucherCodes.co.uk and the Centre for Retail Research indicate British shoppers spent £5.8 billion over the sales weekend in 2016, representing 15% year-on-year growth. Total spend of £10.1 billion is predicted in 2017.
Although Black Friday was originally a physical retail event, forecasts suggest that 77% of consumers will make their purchases on-line. This transition in shopping habits is reflective of an ongoing trend and it is clearly a case of ‘evolve or die’ for many traditional retailers.
As the dust settles on Black Friday, it’s time to pick test the health of some familiar High Street names.
Marks & Spencer
If there is one thing to admire about Marks and Spencer Group (MKS) (M&S), it is its obstinance. For the second consecutive year, M&S has refused to succumb to the whim of US commercialism and Black Friday is still being ignored by the retail giant.
However, the company has clearly enjoyed better times. The retailer’s vital food operation is hardly buoyant, with like-for-like sales down over the last year. Higher input costs driven by a plummeting pound have compounded its grocery woes. Planned expansion plans for new food stores will continue, albeit at a more sedate pace.
Its clothing business has also failed to move with the times. As M&S continues to channel funds into its online proposition, executive reshuffling continues. CEO Steve Rowe does not fear change, having removed nine of 20 executives since he took charge last year.
However, the recently announced departure of new clothing and beauty director Jo Jenkins will not help. Although she will serve a six-month notice period, Jenkins was only a few weeks into her new role.
If Rowe’s five-year plan is simply about profit stabilisation, he is winning. First-half 2018 pre-tax profits of £118 million was almost a 400% year-on-year increase. However, an absence of one-off costs was a huge help. Group sales rose by 2.6% to £5.1 billion, driven by new store openings.
Weakness in the food division remains a concern however, as it has propped up the ailing clothing business in recent years.
Archie Norman, the corporate trouble shooter appointed as chairman in September, recently noted that, “The genesis of any turnaround starts with the recognition of the unvarnished truth.” Perhaps the first truth to acknowledge is that it is necessary to embrace change; M&S could do worse than start with Black Friday.
As the squeeze on our household budgets grows ever tighter, perhaps it is a case of sacrificing quality for price. This subsidiary of Associated British Foods (ABF) continues to gain market share from rivals, including M&S.
As the discount clothing chain’s aggressive expansion phase remains ongoing, ABF stated that Primark can still accommodate “…significant growth”. Almost one-third of the 30 new stores opened globally in the past 12 months are based in the UK.
The importance of our domestic market to the chain’s ongoing growth cannot be underestimated; sales are up 10% from last year as its share of the total UK clothing market “…increased significantly”. From a global perspective, Primark’s revenues increased by 19% to £7.05 billion in the year to September.
A stellar performance over the summer was driven by healthy sales of licensed merchandise, childrenswear, beauty products and homewares. Although the UK womenswear market has recently been contracting, Primark still increased its overall share.
CEO George Weston suggested fashion may have fallen down the list of female priorities in recent times, with holidays, technology and even Netflix (NFLX) taking precedence. Maybe it is sometimes a case of focusing on core competencies rather than worrying about the retail apocalypse. After all, Primark has grown its market share across 10 different countries without any online shopping presence.
Mothercare (MTC) could benefit from some maternal support as its share price is in freefall. Its market cap has almost halved in the last five months, as long-standing issues with its Middle East business weigh heavily.
Although the oil market is clearly rebalancing, recent weakness has affected consumer confidence against a more challenging economic backdrop.
Increased operational costs have added to headwinds which have overshadowed progress made in its domestic market.
UK sales in the first quarter of 2018 have strengthened by 2.5% year-on-year but these gains have been offset by an 8% fall in international sales.
At last week’s half-year results, the baby retailer’s warning of difficult trading conditions saw its share price gap 17% lower at market open.
Nevertheless, the firm is pressing on with restructuring plans. It’s also shutting shops to focus on the web. CEO Mark Newton-Jones also acknowledges a need to minimise dependence on discounted sales.
However, long-term gains will be preceded by short-term pain.
The UK outlook following this reporting period is bearish, with Mothercare witnessing “…a softening in the UK market with lower footfall and spend.”
While Brexit is the bearer of bad news for domestically-focused FTSE 250 (MCX) companies, this grand old dame of British retail has been thriving.
The newsagent and stationer celebrated its 225th birthday this year, making it the oldest national retail chain in the world.
Annual results published in October make for good reading; the strongest sales performance in 14 years supported by an 8% increase in annual profits.
The share price has reflected this feel-good factor, advancing by approximately 35% over the course of 2017.
While a weak pound has hammered companies reliant on imports, WHSmith (SMWH) has been perfectly placed to take advantage of a domestic currency crash.
Tourists have flocked to the UK for shopping jaunts and the company’s travel business sales have benefitted from the influx of visitors over the summer.
To this end, official data indicated that visitors to the UK hit record levels in July. It would seem that this high street stalwart is primarily making gains off the beaten track.
While trading profit at its high street outlets was flat, a 10.3% gain was made at the retailer’s 750 outlets in travel hubs. At £96 million, the latter currently accounts for over 60% of WH Smith’s trading profits.
The company continues to expand its international horizons, with an additional six travel units in both Rome airports adding to its Spanish and German hubs.
CEO Stephen Clarke is bullish about the travel business and feels the company is well-positioned to combat any high street headwinds.
Addressing the supposed demise of our town centres, Clarke noted, “…we’re in prime pitches; we’re in 399 of the top 400 high streets, and that has helped us out. We’ve also been optimising our use of space, growing our margins, and improving productivity.”
A fixture in the FTSE 250 as recently as May of this year, Debenhams (DEB) now languishes in the SmallCap Index.
For one of Britain’s best-loved department stores times are tough, and September’s annual results did little to lift the gloom.
Earnings per share fell 14.7% to 6.4p and profit before tax was down 42% in 2017, largely due to a £36 million exceptional charge linked to a turnaround strategy.
Brexit has cast a shadow Debenhams’ fortunes, with higher import costs exacerbated by evolving shopping trends.
Debenhams may have been late in arriving at the party but it is now trying to marry its imposing high street presence with a greater interactive element.
Significant investment across its stores and on-line offering will mark the advent of ‘social shopping’, “…a fun leisure activity centred around mobile interaction with our customers.”
Despite the “uncertain” trading backdrop, CEO Sergio Bucher is upbeat about the prospects of a ‘rebooted’ Debenhams.
Bucher says: “We are making good progress with implementing our new strategy, Debenhams Redesigned, and are encouraged by the results from our initial trials, as well as the number of exciting new partners who want to work with us.”
There is obviously some merit in finding your own niche and Games Workshop (GAW) has gone from strength to strength in 2017, delivering an approximate 200% return this year.
The wargame maker revisited familiar territory in a recent trading statement, reiterating that strong sales volumes are driving higher profit expectations. In any case, the company has taken advantage of an upturn in a market characterised by volatility.
A concerted effort to improve marketing campaigns and launch products more frequently have also been positive drivers. With over 75% of revenues coming from overseas, a weak pound is a tailwind.
As sales figures dribble in from the Black Friday period, it will be interesting to see how the high street brands have fared. Amid a backdrop of reduced consumption and economic uncertainty, this weekend is more important than ever.
As consumers increasingly swap busy car parks and shopping queues for the tranquillity of the internet, enhancing online propositions remains a key element of business strategy.
Retailers entrenched in the traditional brick and mortars retail model will be encouraged by the success of Primark. However, as the evolving consumer demographic gathers pace, such companies may prove to be the exception rather than the rule.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.