Published 09 Jan 2015 11:07
LONDON (Alliance News) – The FTSE 350 Food and Drug Retailers index is the best-performing sector index so far in 2015 on Friday, as Tesco’s plans to turnaround its ailing business were well-received and drove up the sector as a whole, but the General Retailers index is down so far this year, hurt by weak performances from the likes of Marks & Spencer Group.
The retailers are having to get used to another marked change in shopping trends, as the introduction of “Black Friday” into the UK by US retailing giants like Amazon Inc and Wal-Mart Stores Inc has forced domestic retailers to follow suit, particularly in discounting electronics. Clothing retailers, meanwhile, were hard hit by a warm early autumn, which kept consumers away from shops full of winter clothes. Some struggled to make up the lost ground.
Amongst the general retailers, department store operators House of Fraser and John Lewis, and clothing retailers Next PLC and Ted Baker PLC, have emerged as clear winners of the key UK Christmas trading season.
But as every year, not everyone has been so lucky, with Marks and Spencer Group PLC revealing a disappointing trading performance right across the board, and online fashion retailer Boohoo.com PLC issuing a profit warning due to weaker sales and heavy discounting around that warm autumn.
Echoing John Lewis, unlisted House of Fraser said it delivered “record” sales over the Christmas trading period, driven by strong sales growth online and a stellar Black Friday trading day. John Lewis said Black Friday was larger than the Christmas week as sales pulled forward. It said sales fell off for several weeks before picking up again in the immediate run-up to Christmas.
“This year confirmed the new shape of trade for Christmas, with an early peak at the end of November driven by Black Friday and last minute gift buying,” said John Lewis Managing Director Andy Street, urging clothing and general merchandise retailers to avoid the early discounting.
Next, which is known to hold the line on “full-price retailing” during the peak Christmas trading season, was the first to report in the new year, revealing that total sales grew by 2.9% year-on-year in the fourth quarter of its financial year. The growth was driven almost solely by its online and catalogue business. Having surprised the market with another special dividend, Next said it is expecting to deliver a full-year profit in the middle of its earnings guidance a around GBP775 million.
Next’s strong online trading again underlined the competitive advantage it is enjoying over big rival M&S, which reported a 5.9% decline in online sales after its recently revamped online operation was hit by a meltdown at its brand new distribution centre. Some customers were left waiting for weeks for their orders. Next reported 7.5% growth in its online and catalogue Directory business.
Fashion retailer Ted Baker PLC also posted a jump in sales over the festive period, backed by strong trading for its online business, and said its gross margins were in line with its forecasts in the absence of any significant promotional activity in the run up to Christmas. Its retail sales rose almost 23% year-on-year in the 8-weeks to January 3.
Next said it had been left with more stock after Christmas than in the previous year, but its sale clearance was going according to plan. Ted Baker said sales since Christmas have been “particularly strong”, and it expects to end the year with a clean stock position.
M&S reported yet another quarter of falling general merchandise sales over the key Christmas quarter, down 5.8% on a like-for-like basis, while its food business unit grew like-for-like sales by a mere 0.1%. Analyst consensus was for 1% growth in food like-for-like sales in the quarter and a 3% decline in general merchandise.
M&S said its recently revamped online proposition was hit by issues at its brand new distribution centre which was unable to handle peak volumes, while it also struggled to recover from the warm weather in early autumn, which kept consumers away from buying winter clothing ranges.
“Those with the best service and most efficient delivery propositions tended to outperform. This was seen in the John Lewis, House of Fraser and Next updates. The reverse was seen in M&S,” said Investec analyst Kate Calvert in a research note Friday.
Also firmly in the Christmas losers list was Boohoo.com PLC, which saw its shares hit an all-time low on Wednesday after it warned its full-year results will miss market expectations. It said sales growth over the last four months fell short of its forecasts, blaming the unusually warm autumn weather in the UK which it said forced clothing retailers to discount heavily. UK sales grew just 25% in the period, compared with growth of 47% in the first half.
Tough Christmas trading also hit struggling clothing chain Bank Fashion, which joined parcel delivery company City Link in administration.
J Sainsbury PLC was the first of the UK’s big listed grocers to report on its key sales season figures this week, revealing better sales than its bigger rival Tesco PLC. Sainsbury’s reported a 1.7% decline in like-for-like sales in the 14 weeks to January 3, excluding fuel, slightly better than its own forecast for a 2% decline excluding fuel, as well as analyst expectations for a steeper drop of around 2.5%.
Sainsbury’s management remained cautious about its outlook, especially about customer expenditure, saying that although consumers are better off due to lower prices, rising wages and falling fuel prices, they are spending the extra income on things like new cars rather than groceries.
“It is a story of price deflation and lower commodity prices – it is good for customers but puts pressure on retailers,” said its Chief Executive Mike Coupe.
Sainsbury’s and rival Asda on Tuesday both announced a fresh round of price cuts, as part of multi-million price investments that the supermarkets are having to make to try and meet the accelerating competition they are facing from discounters Aldi and Lidl. Tesco followed with its own price cuts on Thursday.
Tesco posted a 2.9% decline in like-for-like sales excluding fuel for its UK business for 19 weeks to January 3, better than the market had expected, but its sales figures were overshadowed by the news of a raft of new measures to get the supermarket chain back on track.
Tesco’s new chief Dave Lewis announced plans to cut UK central overheads by around 30%, reduce capital expenditure to GBP1 billion, and shut 43 unprofitable stores, alongside halting the development of 49 planned store openings. It also said it will not pay a final dividend for the current financial year.
It’s also consolidating head office locations, restructuring central overheads, and streamlining the levels of management within its stores – all of which it said will deliver savings of around GBP250 million a year, which will cost a one-off investment of around GBP300 million to achieve. It will close its Cheshunt UK headquarters in 2016 and make Welwyn Garden City the UK and Group centre.
Tesco is also set to close its benefit pension scheme to help strengthen its balance sheet, and announced that it has sold its Tesco broadband business and the video streaming unit of its Blinkbox business to telecoms company TalkTalk Telecom Group PLC. It is also exploring “strategic options” for its Dunnhumby data collection business, which includes its Clubcard data set, and is exploring further initiatives for other assets.
Lewis hopes the measures will put Tesco back on the right footing, rein in costs and help rebuild its damaged reputation after an horrendous last few months that included a profit overstatement.
All the large grocers had a torrid 2014, as they were attacked by German discount chains Aldi and Lidl, forcing them into a major price war, as well as losing customers to premium grocers like Waitrose.
“The winners seem to be the more housing related, home & electrical categories,” said Calvert, highlighting trading updates from John Lewis, Topps Tiles PLC and Dunelm Group PLC. “We would expect Home Retail and Dixons Carphone to both report strong trading performances.”
Christmas updates from department store Debenhams PLC and online fashion retailer ASOS PLC next week will most likely draw focus on gross margins and UK competitive pressures.
Also on the watch list is Wm Morrison Supermarkets PLC, Ocado Group PLC, mother and baby products retailer Mothercare PLC, and news of Primark’s Christmas trading from Associated British Foods PLC.
By Rowena Harris-Doughty; rowenaharrisdoughty@alliancenews.com; @rharrisdoughty
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