Retail stocks received a welcome boost this week after Next – first out the blocks with its Christmas results – pleased investors with a 1.5 per cent sales rise.
Despite the fashion giant trimming its profit forecasts for the year, and suffering a near-10 per cent slump in in-store sales, Next shares revved up by 6 per cent, and dragged other beleaguered retail stocks up with it too.
The chink of positive news was well received, particularly amid fears that Christmas 2018 would not deliver for the retail industry.
Next, first out the blocks with its Christmas results, pleased investors with a 1.5% sales rise
A string of profit warnings, Armageddon-like statements from Mike Ashley about ‘unbelievably bad’ trading in November that would ‘smash’ retailers to pieces, and dismal footfall figures meant expectations for Xmas trading have been low… extremely low.
But as each day of 2019 passes without a retail profit warning (yet), it is looking more and more like the painfully slow November, which even stung retail superstars Primark and Asos, was a blip (albeit a severe one) that some firms managed to recover from just in time for Christmas.
That’s not to say next week’s results from M&S, Debenhams, John Lewis and Tesco will be stunning. Far from it.
But this week’s retail rally (M&S is up 1.3 per cent, Debenhams is up 9.5 per cent) suggests that after a tough year, any figures short of dismal will go down a treat with investors.
The City is braced for a tranche of retail results next week as firms like M&S, Tesco and Debenhams come clean on their festive trading performance
What to expect from M&S next week
City analysts are predicting that M&S will report a decline in its third-quarter sales next Thursday.
Although it looks like the High Street stalwart will avoid a profit warning, a feat many thought unlikely a month ago, brokers at Shore Capital are still pencilling a 3 per cent fall in M&S’s like-for-like clothing and home sales, and another 3 per cent fall at its food division.
Shore Capital isn’t discounting the possibility that, like Next, M&S will have to trim its profit forecasts for the full year either.
Analysts are predicting that M&S will report a decline in its third-quarter sales next Thursday
Either way, the results should shed some light on how the firm’s radical overhaul is progressing as M&S strains to become a ‘digital first’ retailer.
The marathon turnaround, under veteran chairman Archie Norman and boss Steve Rowe, involves shutting some 100 stores, closing distribution centres and ramping up its digital offer.
M&S recently appointed former Sainsbury’s boss Justin King to its board as a non-executive director in the hope that the grocery aficionado will help boost its food business during what is a challenging time for all the in supermarket sector.
But without much of an online offer yet to speak of, George Salmon, equity analyst at Hargreaves Lansdown, is not expecting miracles.
Which retailers are reporting next week?
Wednesday: Shoezone, Sainsbury’s, Joules, Topps Tiles, Majestic Wine
Thursday: John Lewis, Card Factory, Marks & Spencer, Tesco, B&M, Debenhams, Mothercare, Ted Baker
Friday: AO World, Moss Bros
Salmon said: ‘M&S is closing dozens of mainline stores as part of its current restructuring and that will inevitably mean total sales are lower this Christmas.
‘Given the troubles affecting the wider high street and the group’s lack of a material online offer, it’ll come as no surprise to hear we’re not expecting pretty things from Marks next week.’
Retail analyst Nick Bubb said that the lack of a profit warning as of Friday might mean that M&S’s Christmas ‘was not much worse than expected in the end’.
But, he added: ‘Or it may mean that M&S want to announce on the back of the BRC-KPMG Retail Sales figures for December that day, for market context, and bury the bad news with all the other retailers announcing on Thursday.’
At barely 250p, shares in Marks & Spencer trade at levels last seen in the wake of the Great Financial Crisis in 2009. So, as AJ Bell investment director Russ Mould puts it, ‘it is fair to say that City expectations are pretty low for Christmas, and for that matter future, trading’.
And what about Tesco?
Meanwhile Tesco, which has enjoyed a strong year on the back of its £3.7billion Booker acquisition, is pipped to be one of this year’s Christmas winners.
Analysts at Barclays are forecasting a 1.3 per cent uplift in UK like-for-like sales for the six crucial weeks to January 5.
The bank’s retail analyst James Anstead said: ‘As with Morrisons and Sainsbury’s, we think Tesco should benefit over the Christmas period from the lack of weather disruption (which hit in mid December 2017) and the presence of an additional ‘full day’ of shopping.’
Tesco was also hurt in 2017 by the fall out from Palmer & Harvey’s collapse.
But the recent quarter hasn’t been plain sailing for the UK’s biggest supermarket.
Tesco boss Dave Lewis launched discount chain Jack’s earlier this year in a bid to beat Aldi and Lidl at their own game
As James Grzinic, analyst at Jefferies, points out, intensified Brexit fears and weather woes may have both knocked consumer spending during Tesco’s reporting period.
He said: ‘Brexit and weather have been incremental challenges since November. The political mayhem was critical in driving a disconnect between a supportive macro context and an increasing reluctance to spend.
‘Footfall challenges accelerated but the softness in spend was evident across all channels.’
To put the firm in a better position to tackle rival discounters Aldi and Lidl, boss Dave Lewis launched Tesco’s own version of a discount chain – Jack’s – earlier this year.
But, with Christmas now behind us, Tesco and its supermarket counterparts are currently facing into two potentially bigger risks.
With the threat of a no-deal Brexit looming, grocers are working to ensure that fresh food supplies don’t run out come March.
Tesco is also awaiting the competition watchdog’s decision on whether or not to green light the merger between Sainsbury’s and Asda, due by March – a decision that will inevitably have a profound impact on the sector.