The Retail Note Xmas 2019: not “the worst Christmas since Woolworths collapsed”
Christmas scaremongering starts early, FY results Zara UK, Home Bargains and The Entertainer, interims from Matalan and Wickes.
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• Sales up but profits down at both Zara UK and Matalan, a familiar pattern at too many fashion retailers. Zara’s annual pre-tax profits fell from £51.8m to £22.3m, despite a 10% rise in sales to £772.5m. Selling and distribution costs increased 7% over the year but it remains committed to its 63-strong estate and further openings “as opportunities arise”. In the 14 weeks to 31 Aug, Matalan posted an 11.3% rise in sales to £292m, but saw EBITDA fall 28.5% to £16.3m, a reflection of industry-wide discounting exacerbated by “awful” spring weather.
• Ongoing outperformance from Home Bargains. For the year to 30 June, the business posted a 15% rise in pre-tax profit to £233.3m, while turnover increased by 15.2% to surpass the £2.5bn threshold. During the year the value operator opened 26 new stores, ending the period with a total of 506 stores. The retailer is aiming to double its store estate to 1,000 in the coming years.
• Strong performance from the largely unheralded family-owned toy specialist The Entertainer. In the last financial year, the business saw pre-tax profits rise 29% to £147.7m, on sales ahead 22% to £204.4m. A business that thrives despite sticking to strong moral values – its stores do not open on Sundays, it doesn’t stock Halloween or Harry Potter merchandise and donates 10% of its profits to charitable entities in the UK.
• Another rare thing – a DIY operator that is trading well. Wickes recorded a sales rise of 8.3% in Q3, underpinned by a 9.7% uplift in like-for-like sales in its third quarter. Wickes’ demerger from parent Travis Perkins is set to be completed by the second quarter of the next financial year.
Stephen Springham, Head of Retail Research:
Christmas seems to arrive earlier each year. And the media scaremongering seems to plumb new depths every year too.
It’s only mid October and we’ve already had a least two apocalyptic predictions on the outturn for this Christmas (or ‘The Golden Quarter’ as the media seem to have dubbed it, with breath taking imagination and creativity). Apparently, the sector is “braced for the worst Christmas since Woolworths collapsed” and “Brexit fears threaten to put the breaks [sic] on Christmas spending”.
The source of the Woolworths’ analogy? An unnamed chairman of a national retailer quoted in The Mail on Sunday. So, effectively a chairman (note, not a CEO) of a retailer that is probably underperforming, making an off-the-cuff comment to a journalist, which is interpreted as a damning indictment of the whole retail market. What is worrying is that even a frivolous comment can quickly become standard narrative.
Woolworths’ demise in December 2008 was undoubtedly a “Kennedy moment” in the history of UK retail. But it didn’t happen in isolation. Lehman Brothers had collapsed only three months previously and we were at the start of the Global Financial Crisis. A number of UK retailers subsequently collapsed in the wake of Woolworths and in the post-Christmas period. What did retail sales do that Christmas? A quick trawl through the history books showed that they weren’t disastrous in themselves – in Q4 2008, retail sales values grew by +1.8% and in December 2008 in isolation, they grew by +1.5%. A slowdown yes, but not the consumer apocalypse many assume.
Could this Christmas conceivably be as bad as December 2008? To my mind, not by any stretch, even taking into account any ‘worse-case’ macro-economic or political scenarios. I have yet to get my envelope out to make my own Christmas predictions, but I can say that I would expect retail sales growth to comfortably outstrip the levels achieved in December 2008.
But in terms of general pain and fall-out? Again, it is hard to envisage the scale of distress recurring this Christmas, principally because much of it has already reared its ugly head in the form of CVAs over the last couple of years. Some retailers will inevitably fail (and Debenhams remains the most significant and worrying name on many people’s ‘watch list’), but the level of fall-out is unlikely to be as large as that of Christmas 2008/early 2009 (when we also lost the likes of MFI, JJB Sports, amongst many others).
The other, marginally less Doomsday release at least provides some actual quantification of spending predictions over the festive period. Vouchercodes.co.uk (in partnership with The Centre for Retail Research) are forecasting that spending will increase by just +0.8% in the six weeks to the end of December. But curiously, they also provide a revised down figure of just +0.2% in the event of a no deal Brexit.
The following statement may cause many economists to fall off their seats: I don’t expect the outcome of current Brexit negotiations to have any material impact on consumer spending over Christmas. For the simple reason that if consumers want to spend and have access to the resources to do so, they will, regardless of any macro-economic or political situation. As and when I produce my own predictions, they will not be nuanced by any ‘what if’ scenarios. For all the malaise in the retail sector, retail sales continue to hold up far better than any of us could have anticipated in the wake of the Referendum vote.
These two early predictions are just a pre-cursor of what is likely is to follow, a whole raft of media scaremongering. To be honest, even in the good times, reporting on Christmas trading left a lot to be desired, the widespread use of positive hyperbole often distracting from the actual state of the retail market. For years, the narrative was of “bumper” Christmases and “spending bonanzas”, when really the structural failings that we now face were bubbling away and building beneath the surface.
Christmas is obviously the busiest time for most retailers, but it is not the be all and end all. Few retailers succeed or fail on the basis of one season’s trading.
The challenges facing the UK retail sector are structural and run far deeper than whether it’s a ‘good or bad Christmas’. Weak retail sales growth over the festive period will not bring the sector to its knees any more than it is now. By the same token, strong retail sales growth will only provide respite rather than resolution. It would be naïve to think otherwise.