Less than 12 hours after the Bank of England expressed concerns about the rise in consumer credit we’ve seen a host of Britain’s biggest retailers deliver what are by and large some fairly decent trading numbers.
Thus far this week we’ve seen a very decent performance from the retail sector, supermarkets in particular and today has been no different with Tesco (LON:TSCO) reporting results in line with expectations, which resulted in a bit of a sell-off initially but only because the share price had been rising all week. Other than the headline numbers coming in line with expectations the internals are much more positive with the company growing its market share for the first time in several years, as well as stating that it expects to meet its operating profits forecasts with perhaps some room to spare.
Last week we heard from Next about a tough retail environment affecting its business, but it would appear that it’s more a case of consumers shopping elsewhere as John Lewis, Marks and Spencer (LON:MKS), ASOS (LON:ASOS), Primark and Debenhams reporting good trading updates.
Marks and Spencer it would appear is finally starting to show signs of a turnaround with a much better than expected rise in its clothing sales, while total sales rose 3.1% over the quarter. The food division also showed some decent growth of 1.3% in stores open more than a year. With the addition of the expansion being seen with the opening of new food halls over the last 12 months, these numbers should only improve. This augurs well for the future with both sides of the business looking strong as we head into 2017.
ASOS also reported some good numbers, as did John Lewis with a year on year increase in sales of 4.9%, though management warned that staff bonuses would be lower this year due to slimmer margins and a more challenging retail environment, as profits come under pressure.
Primark and Debenhams also reported fairly decent performances over the Christmas trading period, with Primark showing an increase in sales, though that hasn’t stopped its shares falling sharply, while Debenhams saw its sales boosted by a focus on beauty products and also seeing an improvement in its on-line business.
It’s becoming increasingly clear that the retail space is changing rapidly, John Lewis pre-Christmas numbers once again showed decent sales growth, building on the back of a strong Black Friday performance, reflecting the fact that if the product is right then the numbers should take care of themselves.
The big concern now is that the deflation premium, which has been achieved on the back of lower commodity prices and increased competition is about to come to an end as a lower pound starts to drive up import costs.
How retailers deal with this in the coming months will be important in the context of future sales growth and revenues. John Lewis has already given the markets a flavour of how this might play out by cutting bonuses, while Tesco earlier this week cut jobs at one of its major distribution centres.
Tesco CEO Dave Lewis admission that further inflationary pressure is coming is likely to intensify this pressure with last year’s Marmitegate saga a signpost of what may lay ahead.
Since 2004 we’ve seen annual retail sales growth breach 6% on just three occasions, and on each occasion after that we’ve seen a sharp slowdown, back to levels of around 2.5%. Retailers need to be prepared for that and while today’s numbers are welcome, they are no guide to what 2017 may bring to the sector as a whole.
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