The retail note - 9 November 2017
Stephen Springham, Head of Retail Research, breaks down the latest sector headlines.
5 minutes to read
- ‘Record decline for non-food in October’ read the somewhat alarmist headline for the latest BRC retail sales figures. And the accompanying numbers weren’t great (total sales growth of 0.2%, like-for-likes down 1%). But this needs to be put in the context of a very strong year-on-year comparable and desperately unfavourable weather. Some consumers are also no doubt waiting to see what Black Friday may (or may not) bring in November. But above all, the BRC release is a pretty blatant warning / plea to the Chancellor ahead of the Autumn Budget on 22 November.
- Solid figures from Sainsbury’s. Group sales increased 15.8% to £14.6bn in the 28 weeks to 23 September, with like-for-likes up 1.6%. Total grocery sales increased by 2.3% and clothing sales advanced 6.8%. Sales from its online food business rose 7.2% year-on-year, while its Sainsbury’s Local convenience arm registered an 8.2% uplift. On an underlying basis, which stripped out £31m of costs included within its statutory reporting, pre-tax profit fell 9% to £251m – ahead of analysts’ forecasts of £240m.
- Very mixed fortunes from the clothing retailers reporting over the last week. Top performer was Superdry (overall retail sales growth of 12.8% to £242.7 million for the 26 weeks ended 28 October, with like-for-likes up 6.3% and an increase of store space of 15.4%), followed by Primark (group sales up 19% for the year ended 16 September, with UK sales up 10% overall and 1% on a like-for-like basis). At the other end of the spectrum were Gap (sales down 9.9% and an increase in operating losses of 3.1% to £20.3m) and New Look (overall sales down 4.5%, like-for-likes down 8.4% and an operating loss of £10.4m against a profit of £59.3m in the same period last year).
Stephen Springham, Head of Retail Research:
Which retailer comfortably beat all analyst expectations this week, reporting a 2.6% increase in group revenue to £5.1bn and a sixfold leap in statutory pre-tax profits to £84.6m? Marks & Spencer is, of course, the answer, although most of these headline numbers were buried in the usual deluge of ‘how to fix an ailing UK bellwether’ naval-gazing narrative.
Of course, there is a great deal more to M&S’ trading figures than these headline numbers, some good, some bad. In the latter camp was the performance of the food division. So long the pillar on which the business depended, food like-for-likes declined by 0.1% in the first half of the year. Taking into account inflation, the decline in volumes would be even steeper. Overall food sales grew by 4.4%, largely on account of continued roll-out of Simply Food stores. Much was made of the fact that it is also decelerating the pace of new store openings going forward, although 80 over the next half-year is hardly pedestrian. In my opinion, there is nothing unduly wrong with M&S’ food business - what has changed is the competitor set has got much stronger over the past year, particularly Tesco, Morrison’s and Sainsbury’s.
On the surface, the clothing figures do not appear much better, with like-for-likes declining by 0.7% in the first half. But there is considerable comfort in the quarterly trend data, which saw an improvement from -0.5% in Q1 to +0.6% in Q2. Credit for this was given to the new Autumn ranges, which is significant in that they are the first that new CEO Steve Rowe (who has only been in the job since April 2016) would have had full control over. The direction of travel on this is positive, but must be maintained. Other positive pointers were a 5.3% increase in full-price sales and subsequent 140 bps improvement in gross margin. A reflection of far less discounting and promotional activity – don’t expect M&S to partake in the folly that is Black Friday, for example.
News of a widespread cull of the store portfolio was anticipated, but did not materialise. The business only said that it would “accelerate” its transformation plan of streamlining its physical presence. As I’ve argued before, M&S issues are far more deep-seated than how many stores it has and simply closing stores is not the solution to its problems.
Does M&S have a perfect store portfolio? Absolutely not. Does any retailer? No, but M&S has been less proactive in managing its estate over the years than most. Rather than randomly shut a load of stores as many who know little about property markets are advocating, I would imagine the business is undertaking a root-and-branch review of every individual site it occupies. For each, it will need to understand the market that it currently serves, which may well be very different from that of 40/50/60 years ago when it first opened. Is this the right store for this location? In many cases, the answer will be ‘no’, so the next question will be what it needs to do to make that store fit for purpose. Downsizing may be the right solution in some locations, re-merchandising and achieving a more appropriate product mix in many others. Believe it or not, upsizing or re-locating to larger premises may be equally viable in some locations, as many M&S stores are actually under-spaced to do justice to the market they serve. Closing stores is very much the last resort – and is a far more complicated and costly exercise than most non-property commentators realise.
How to fix M&S, in my view? Get the womenswear offer right (product first, price point second). Period.