Talk in the City ahead of Christmas was for retail to take a pasting. But it’s not all bad and there will be winners as well as losers.

The updates thus far reveal a very mixed bag. Whilst Next delivered a surprisingly upbeat peak season update, figures from Debenhams and Mothercare remind us that the sector is under a lot of pressure. Supermarkets appear in a decent shape, but department stores and some speciality retailers are in trouble. There is potential for some bleak numbers from some to precipitate a wave of consolidation.

Market conditions


No wonder the retail sector is in trouble. We’ve been talking up the slacker consumer spending for months and ever since the Brexit vote in June 2016 the market decided that retail would suffer. What was surprising was the resilience of the UK consumer in the short-term. But the signs from Christmas 2017 are that the tough times are beginning to bite.

We note Visa/IHS data shows a significant slowdown in spending in December which meant 2017 saw a fall in spending for the first time in 5 years. Consumer spending fell 1% year-on-year, declining for a fourth straight month. It left spending down 0.3% for 2017 as a whole, the first annual decline since 2012. However Kantar data points to stronger supermarket sales.



Mothercare suffered a serious setback to its turnaround strategy in the peak season, with Monday’s trading update pushing shares to all-time lows. UK like-for-like and online sales both collapsed in the 12 weeks to the end of December, forcing management to cut its profits guidance for the year.

Profits are now expected to fall to between £1m and £5m, versus previous expectations for c£10m. Total group sales were down 2.4% in the 12 weeks to end of Dec, consistent with the first half of the year.

The warning comes after the group reported a £0.7m loss in November’s half-year report and signalled that market conditions were challenging in both the UK and Middle East. In that regard it looks like softening in the UK market with lower footfall and spend has got worse, although there is some light in the Middle East.

UK like-for-like was off 7.2% in the 12 weeks to the end of December and means YTD LFL sales are down 0.9%. This is particularly disappointing given the recent progress on that front - UK like-for-like sales in the UK grew 2.5% and gross margins rose 34 bps in the first half.

Worse still, online sales in the UK suffered a 6.9% decline in the reported period. While it’s fair to blame lower footfall, it should still be enjoying online growth.

We should look to management’s decision not to discount in the peak trading season. Admirable perhaps but with competitors slashing prices ahead of Christmas amid (justified) fears of a slowdown in consumer spending, it looks as if the ‘conscious decision’ to remain at full price prior to Christmas but to then discount more heavily in the end of season sale was a mistake. Clearly Mothercare et al are up against it, but the decision not to discount may cost Mothercare more than a few basis points of margin.

Overall UK sales are in serious decline, sliding 11%, but should be seen in context of planned store closures as part of management’s push to reduce costs.

Better news in the Middle East. In November the company said there was no clear sight as to when things will bottom out in that region. So the silver lining in today’s murky update is the return to moderate growth in the Middle East over the last seven weeks. Russia also saw a return to growth in the latter part of the trading period.

Mothercare has been on the slide for a long time as the big supermarkets have been able to gain market share in children’s clothing and toys. Expect accelerated efforts to reduce costs and a focus on fixing online but with a market cap now below £80m it is undoubtedly a takeover target.



A second Christmas trading profit warning in four years for Debenhams hit the stock for six, although admittedly the troubles had been fairly well flagged in October.

Group like-for-like sales fell by 1.8%, with a 2.6% drop in the UK offsetting the 2.1% rise in international sales. Management expects profits for the first half to be £55m-65m against previous expectations of c£80m.

Debenhams faces structural pressures in department stores. We note House of Fraser is seeking help on rents, which may signal a pretty horrendous Christmas trading period.

Are there any reasons to be cheery? On the plus side, digital sales climbed 9.9% and are up 22% in two years. CEO Sergio Bucher (ex-Amazon) is upbeat about the transformation progress and mobile sales are rising quickly. But high fixed costs and structural problems for department stores mean there may be better bets than Debenhams.

The problem in department stores is self-evident: in the current format and number of stores, they’re past their sell by date. There is not room on the high street for John Lewis, House of Fraser and Debenhams. John Lewis continues to outperform, but the outlook for the other two is not great. They increasingly look like dinosaurs in the post-Amazon retail market.



Somewhat against the odds, Next reported a positive update for Christmas. Full price sales in the 54 days from Wednesday 1 November to Sunday 24 December were up +1.5% on last year; an improvement on the November guidance of -0.3%.

Consistent with all the recent trends, sales in Retail were down heavily (-7.2%), but offset by surging online sales (+10.4%). To a degree we can characterise relative performance of retailers as depending on whether online sales can do enough to compensate for the falling physical sales. Next is getting it right just about; Debenhams is slowly making progress but not quickly enough; Mothercare is a long way behind.

Next was careful to thank the weather for the improvement, having warned in November that sales performance was ‘extremely volatile and is highly dependent on the seasonality of the weather’. Looking beyond seasonal fluctuations in the weather, the business remains strongly cash generative, albeit not expanding rapidly.

Even for Next, the market still looks tough. “Many of the challenges we faced last year look set to continue into the year ahead,” the company said in the update.  “Subdued consumer demand driven by a decline in real income, the increase in experiential spending at the expense of clothing, and inflation in our cost prices remain challenges for 2018.”


Highlights this week


The big supermarkets are in action and while they face some similar pressures to the broader market the trio of Morrison (Wm) Supermarkets (MRW), Sainsbury (J) plc (SBRY) and Tesco plc (TSCO) appear fairly well insulated as store price inflation returns.

Kantar figures show like-for-like grocery prices +3.6% in the 12 weeks to December 3rd, underpinning a 3.1% rise in sales by value during the period. This should be broadly supportive of margins for the sector.

We see pressures coming from the usual sources – discounters. Kantar data for the 12 weeks to December 3rd show Aldi and Lidl both grew sales by around 15%. Tesco, Sainsbury’s and Morrison’s all lost market share in the period despite growing sales overall.

In November, Morrison’s reported its 8th straight quarter of LFL sales growth – yet more proof that David Potts and co are doing the business with the turnaround strategy. A new home and leisure range, combined with the new automated ordering system which was operational in time for the key Christmas trading period, underpin confidence in MRW, which is trading c+9% above its mid-November lows.

The other supermarket Dave (Lewis) will also be breathing easy after the Booker deal got the green light just before Christmas. Plenty of solid signs for Tesco on the sales front with Kantar saying it was top of the big 4 in the quarter to Dec 3rd. Going forward the Booker tie-up should also let it keep costs down more easily. Cost synergies of around £200m a year, mainly from buying and distribution, are expected, although this could a lot more and may exceed £300m. A pretty weak comparison period a year before should help flatter Tesco’s numbers and give Lewis a boost ahead of the Booker vote in Feb. The problem for TSCO is one of expectations – shares are already up by about a quarter from the June lows and may struggle to find much upside if growth remains only solid. Throughout 2017 we saw TSCO shares ramp ahead of trading updates and results on sky-high expectations, only for the shares to slide back on the release.

Sainsbury’s is coming at this from a more challenged perspective after profits slid 9% in the first half. If retail is about margins, Sainsbury’s has a big worry – arguably more of a concern than its chief rivals – after it reported that retail underlying operating margin declined by 58 basis points year-on-year to 1.89 per cent (2016/17: 2.47 per cent) in H1.

But sales are rising sharply as it integrates Argos into the business. As the costs of integration roll off the uplift from higher sales should start to feed through to the bottom line. The core grocery business has lost some appeal and appears to be squeezed on several fronts. While discounters are the chief concern, Sainsbury’s has struggled ever since Tesco got its house in order under Lewis. SBRY has recovered some 7% or since the November lows and expectations remain fairly low with consensus for the retailer to lag Tesco and Morrison’s in sales growth.

For Marks & Spencer Group plc (MKS), the Christmas trading period is crucial to the future of Steve Rowe’s turnaround strategy two years in. The market was already getting nervy following the November half-year report before Debenhams failed to inspir confidence. Shares in MKS fell more than 3% on the read across from DEB.

As we noted in November, Christmas provides the real test for MKS. We noted that the weak figures for October from the industry (Next, John Lewis), suggests things could be rough. However both these two have had stronger-than-expected peak seasons and this could indicate a more resilient performance by Marks. But it’s up against a pretty solid comparative period a year ago, when total UK LFL sales were +1.3% (Clothing & Home +2.3%, Food +0.6%)on the year-ago period, albeit the 2015 Christmas trading period was exceptionally weak. And like the department stores, it's struggling for relevancy.


List of retail trading updates this week



Majestic Wine PLC (WINE)

Morrison (Wm) Supermarkets (MRW)

Topps Tiles plc (TPT)


Sainsbury (J) plc (SBRY)

Shoe Zone plc (SHOE)

Supergroup (SGP)

Ted Baker (TED)

Quiz plc (QUIZ)


AO World plc (AO.) (BOO)

Booker Group plc (BOK)

Marks & Spencer Group plc (MKS)

Moss Bros Group plc (MOSB)

Tesco plc (TSCO)

John Lewis and Waitrose Christmas trading update


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