The first two weeks of the new year have delivered a spate of profit warnings in sectors ranging from housebuilding to recruitment, but one part of the UK’s corporate landscape has proved surprisingly resilient: retail.
Predictions of a yuletide of woe on the high street, as shoppers faced with rising borrowing and household bills drastically cut back on spending, have failed to materialise. So far, car parts and bike seller Halfords has been the only conspicuous profit warning — easily outnumbered by upgrades from peers including Next, JD Sports and B&M.
Compared to recruitment, where important players Robert Walters and PageGroup have warned on profits, or technology, where cyber security specialist Darktrace and video game developer Frontier have said they would record lower revenues than expected, retailers have largely stuck with their full-year forecasts.
They do not yet appear to have suffered from political uncertainty or the knock-on effect from a recent jump in mortgage costs, both of which were flagged by housebuilder Barratt for slowing home reservations.
Kien Tan, retail director at PwC, said this was partly a function of which names had updated investors so far — mostly blue-chip companies with strong market positions and clear strategies that had “been at the good end of lots of trends”.
Higher prices
Many areas of retail, from food to technology, have been broadly deflationary for years, increasing the purchasing power of consumers. That changed in 2022 as prices surged, particularly following Russia’s invasion of Ukraine, and meant that retailers needed to sell fewer wares in order to achieve the same revenue. Broadly speaking, consumers bought fewer things but retailers’ turnover still rose.
Price inflation in areas such as fashion has been fairly modest so far, but in food it has been high — and a creditable 7 per cent rise in festive sales at both J Sainsbury and Tesco needs to be seen in the context of food prices that are on average 16 per cent higher than a year ago.
Favourable comparisons
December 2021 was marked by the rapid advance of the Omicron variant of coronavirus and although no national lockdowns were imposed, many consumers remained wary of mixing in crowded places or had smaller gatherings at Christmas. That hurt retailers with thousands of stores and meant that this year’s sales were up against weak comparative figures.
The most obvious example of this was Argos, the general merchandise seller owned by supermarket chain J Sainsbury. A 4.5 per cent increase in sales for the third quarter looks healthy enough — but sales fell 16 per cent in the same period a year ago.
Shoppers flock back to the stores
When Britain was gripped by fear of catching Covid-19, consumers largely shopped online. But one of the defining trends of last year was the return to shops, and stores got a further boost in December from a sudden cold snap and disruption to delivery services due to postal strikes.
“The channel shift [back to stores] has been a benefit for the biggest retailers,” said Lisa Hooker, head of UK retail at PwC. “The online share of sales is now only a year ahead of where it would probably have been had Covid never happened.”
At Next, store sales grew 7.5 per cent in the nine weeks to December 30 while online sales fell. At Marks and Spencer, clothing sales in stores were up 12 per cent in the third quarter.
Sales made in stores generally mean higher profit margins than those made online for many retailers, because the customer bears the cost of “last mile” transport and the running costs of stores are largely fixed.
Protecting Christmas
Supermarket bosses readily acknowledged that consumers shopped earlier and more carefully this year. But like the annual summer holiday, Christmas is an event that many families regard as almost sacrosanct — especially after the disruptions of the past two years — and were determined to enjoy it.
Lionel Desclée, chief executive of Very Group, agrees. “Christmas is very important to the families that we serve and they have clearly worked hard to protect it,” he said. The online retailer and credit provider sells mostly to customers in lower income groups, who in theory would be the most exposed to cost-of-living concerns.
Hooker added that in-person gatherings of families “tend to mean more food and more presents”, which may explain why half of the respondents to PwC’s latest survey ended up spending more on presents, not less.
Surplus stock
The summer of 2021 featured heavy disruption to the global supply chains that keep shelves stocked — including renewed lockdowns in Asian manufacturing centres and limited shipping capacity. That meant many retailers, especially in toys, electronics and technology, went into their peak trading period with far less inventory than usual.
Next chief executive Lord Simon Wolfson said that with hindsight, availability may have affected sales more than he believed at the time, with a correspondingly beneficial impact in 2022.
Overdone pessimism?
Many retailers issued their most recent and arguably conservative profit guidance between April and October, a period bookended by Russia’s invasion of Ukraine and the brief but chaotic Liz Truss premiership in the UK.
As some inflationary pressures come down, chief executives are a little more confident.
“There is nothing yet that we are particularly worried about” said M&S chief executive Stuart Machin, when asked about the outlook this week. Ken Murphy at Tesco declared himself “cautiously optimistic”.
Richard Walker at Iceland Foods said there “seems to be a bit of normalisation”, though spending among lower income groups is still under intense pressure.