Retailers Disappoint Shareholders as Sales Slump

Trading updates for the key Christmas period for UK retailers were a mixed bag, with a couple of profit warnings thrown in for good measure

David Brenchley 12 January, 2018 | 7:03AM
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Next defied analyst expectations by growing sales over the festive period. Others were not so lucky

Investors in UK stocks spend much of the first few weeks of the year digesting festive trading updates from both high-street and online retailers.

Being first to report, Next (NXT) has become something of a bellwether for the UK high street and there are plenty of aspects to the firm’s 2017 results that can be extrapolated for the rest of the sector.

“What you saw was store sales declining but online doing pretty well,” Colin Morton, manager of the Silver rated Franklin UK Equity Income Fund, told Morningstar.

High-street Retailers

Next’s performance was far from stellar, but it confounded analyst predictions thanks to a 1.5% rise in full price sales, compared to consensus forecasts of -0.5%. Next Directory, its online offering, saw sales rise 13.6%, offsetting a 6.1% decline in shop purchases. That sent shares up 10% on the day, reversing an 11-week peak-to-trough decline of 22%.

The news got worse before they got better. Debenhams (DEB) and Mothercare (MTC) warned on profits and investors punished both, sending shares down by more than 20%.

It was a similar, though not as dramatic, picture for Marks and Spencer (MKS). M&S had a tough third quarter, with like-for-like revenues down 1.4% in the 13 weeks to 30 December. Shares fell over 6%.

SuperDry (SDRY) and Moss Bros (MOSB) were also amongst the losers, but Topps Tiles (TPT), Ted Baker (TED) and Majestic Wine (WINE) had encouraging periods of growth.


Morrisons (MRW) and Sainsbury’s (SBRY) both pleased the market, with shares up around 5%. Both grew sales at decent but unspectacular rates, with Sainsbury’s upping full-year profits guidance as it sees more benefits from its 2016 acquisition of Argos.

Tesco (TSCO) put a blip on the results for the big names on Thursday, with sales growth of 1.9% missing analyst expectations of 3.2%. Shares weakened 5% as a result.

But discounters Aldi and Lidl continue to take market share at an alarming rate. “Sainsbury’s and its large supermarket peers are putting up a better fight,” says Helal Miah, investment research analyst at The Share Centre. However, he adds, the market share data paint “a difficult picture”.

With a fair value of 317p suggesting upside of more than a quarter, Morningstar analysts prefer Sainsbury’s to its two peers despite what they see as “a challenging UK food retail environment”.

Online and Specialist Retailers

This category was undoubtedly the winner of the Christmas trading period. The ever-impressive (BOO) saw group sales for the four months to 31 December double, with UK sales up 107%. The online fashion seller upgraded full-year forecasts for the second time in that period, but shares were little changed.

Joules (JOUL), the online retailer of clothes and homeware, saw sales rise almost a fifth in the seven weeks to 7 January. We’ve still got the likes of ASOS (ASC) to come, but odds are they will have followed boohoo’s lead, as they have done in recent years.


Against a positive backdrop for shares generally, UK retailers have struggled since the EU referendum of June 2016. Since 24 June, the FTSE UK General Retail index fallen 1.24% in total return terms according to Morningstar Direct data. This is a huge underperforming to the FTSE 350, which has seen gains of 28.44%.

This is due to a double whammy of headwinds, with consumers having less cash in the pockets due to rising inflation being added to the continued change in consumer behaviour towards online purchasing.

Morton says the former will hopefully abate this year as currency and Brexit-related effects get stripped out of CPI readings and inflation moderates. The latter, though, continues to provide structural issues.

“A lot of the bigger retailers have the battle of trying to get the stores right, the online right, different categories – food, clothing, home. They’re the ones who are finding life pretty tough at the moment,” Morton says.

Where’s the Value?

While the online-only cohort and those specialist sellers have performed better, valuations are a problem. Boohoo continues to impress, but trades on a price/earnings ratio of around 35 times 2018 earnings. While broker Investec reckons that’s attractive, Morton disagrees, saying: “They’re not for us.”

Morton has been a long-term owner of Next, which he says has done well on a 10-year view but not so well on a two-year view. Despite that, he still likes the firm, noting it’s currently trading on a 30-40% discount to the market with a healthy free cashflow yield of around 8%.

The £300 million share buyback scheme gives confidence, too. George Salmon, equity analyst at Hargreaves Lansdown, agrees, pointing out that Next only tends to do this when management believe it worthwhile. “Management clearly think the shares have potential,” he explains.

Still, it won’t be an easy ride. “If you look at the volatility of Next in the last year, you’ve had a very good quarter followed by a very tough quarter followed by a very good quarter,” says Morton. “That’s how tough this industry is at the moment.”

Investec says its top picks for 2018 are JD Sports (JD.), SuperDry, Boohoo, Halfords (HFD) and N Brown (BWNG).

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
ASOS PLC356.80 GBX-0.45Rating
Boohoo Group PLC33.62 GBX-0.30
Brown (N) Group PLC14.18 GBX-0.53
FTF Martin Currie UK Equity Income W Acc2.60 GBP-0.19Rating
Halfords Group PLC147.60 GBX-2.25
JD Sports Fashion PLC116.95 GBX-2.78
Marks & Spencer Group PLC245.80 GBX-1.76Rating
Mothercare PLC5.65 GBX5.61
Naked Wines PLC53.50 GBX-2.99
Next PLC8,774.00 GBX-0.79
Sainsbury (J) PLC258.80 GBX-1.45Rating
Superdry PLC9.06 GBX6.59
Tesco PLC281.40 GBX-0.46Rating
Topps Tiles PLC40.50 GBX-1.22

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David Brenchley

David Brenchley  is a Reporter for

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