The retail note - 7 March 2017
Stephen Springham, Head of Retail Research, breaks down the latest sector headlines.
3 minutes to read
- A reduction in partners’ bonuses (from 10% to 6% of salary) overshadowed otherwise solid annual figures from John Lewis. The overall Partnership posted a 21.2% increase in full-year profits for the year to 28 January to £370.4m. Overall sales grew by 3.2% to £11.4bn during the year. John Lewis achieved a 2.7% lift in like-for-like sales during the period. Like-for-like sales at Waitrose fell by a mildly disappointing 0.2% during the year, although operating profits were up 9% to £253.5m.
- The impressive turnaround at Morrisons continues apace. Stripping out one-off costs, profits jumped 11.6% last year to £337m, the first increase for five years. Like-for-like sales for the year grew 1.7%, with an accelerating trend (+2.5% in Q4). Total revenue rose 1.2% to £16.3bn, despite the fact that the previous year’s comp included the now-offloaded convenience business. Capex rose 14.8% as the business invested in its six strategic priorities.
- Strong figures from Dreams, with full-year sales rising 20% to £280m in 2016. Like-for-like sales increased 14.1% during the period, driven by the implementation of a three-year turnaround plan by chief executive Mike Logue. Despite investments, profit before tax surged 136% to £32m. The business is rolling out 20 new concept stores in 2017, while refurbishing a further 30, and launching a new digital format.
Stephen Springham, Head of Retail Research:
Two months into the year, what have we learned about the state of the UK retail market? Consumer demand has inevitably softened since an almost gravity-defying second half of 2016, but it has certainly not fallen off a cliff. The February figures from the BRC were fairly muted – total retail sales rose 0.4% year-on-year, but were down 0.4% on a like-for-like basis. The ‘official’ ONS figures will no doubt be stronger than these when they are released later in the month, but even they are likely to show a decelerating trend.
As we have articulated in previous notes, it is unwise to read too much into the actual figures for both January and February as they tend to be the slowest months in the retailing calendar and are very much a ‘settling down’ period post Christmas. March and April are far more important in the grand scheme of retailing, but again, it is notoriously difficult to interpret the numbers due to the timing of Easter each year.
Nevertheless, there are already some clear pointers as to the general direction of travel for the retail sector this year. Consumer demand will be more fragile this year than last, although this does not necessarily mean that overall retail sales will be down year-on-year. There will almost definitely be both volume and value growth this year, although not at the same level as last year (volumes +4.7% and values +3.1%). A deceleration in growth, rather than a decline.
As has been widely trumpeted, 2017 will also see rising price inflation. We have already tipped from a deflationary to an inflationary environment in some markets, although this has been far less dramatic than feared. Food prices increased 0.4% in February, according to the BRC and Nielsen. However, non-food prices remained deflationary, falling by 1.8% during February. The conundrum of rising input costs and the extent that they can be passed onto the consumer will obviously play out far more as the year progresses, but massive price hikes still seem unlikely.
Thirdly, there will something of a flight towards non-discretionary spend categories. We can already see this in the BRC retail sales figures for February. Over the three-months to February, food sales increased 0.6% on a like-for-like basis and 2.0% on a total basis. This marked the third consecutive 3-month average total growth of 2.0% or above, taking the 12-month total average growth to 1.2%, the highest since May 2014. Partially inflationary, yes, but still with respectable volume growth as well.
The media narrative is already inflation-obsessed and there is a danger that any real growth in retail sales in the coming months will either be overlooked, miss-interpreted (e.g. by focussing on month-on-month rather than year-on-year figures) or lazily dismissed as purely inflationary. More than ever, be wary of what you read in the papers.
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