Given recent headlines around UK retail you’d be forgiven for thinking the sky is falling in across the sector.
For sure the sector is facing its challenges as the headlines surrounding Debenhams as well as recent failures from the likes of LK Bennett and Patisserie Valerie will testify having dominated the airwaves in recent weeks, while the big supermarkets are facing challenges from the young upstarts at Aldi and Lidl.
In a sign of how challenging food retail is, Sainsbury has seen its crown as number two UK supermarket slip, with Asda edging above it in a sign that the recent talks of a merger may well have seen management take their eye off the ball a little.
This competitive environment makes this morning’s results from Tesco all the more impressive as CEO Dave Lewis announced another step forward in the UK’s number one food retailer’s turnaround plan. A 28.8% rise in profits to £1.67bn and an 11% rise in revenues to £63.9bn.
On pretty much every measure Tesco was able to beat expectations, with a rise in sales, revenues and profits, though the sales performance in Central Europe and Asia markets was disappointing. The continued integration of Booker Group has also added to the mix in terms of sales, but is still acting as a slight drag on margins.
Just over a year ago Dunelm Group was another retailer warning about lower profits and margins as it struggled to integrate Worldstores.co.uk and Kiddicare.com into its business model. It was also in the process of embarking on a turnaround plan and by calling time on these underperforming brands the company appears to have turned a corner. This was borne out earlier this year when management reported that group revenue rose 2% over the December period.
The renewed focus on the core brand appears to have reaped benefits in store and on line with increases in revenues on both sides of the ledger. This has been reflected in a decent Q3 for the homeware retailer, and has translated into like for like revenues increasing by 12.5% with on-line revenues a big factor in the outperformance, with a rise of 32.1% on the quarter, and a 34.4% rise financial year to date.
Margins also came in well ahead of expectations, rising 90bps over the same quarter last year, while net debt has been reduced from £123.8m in 2018 to £48.3m, with management expecting full year profits to come in slightly above consensus forecasts, boosted by a buoyant homecare market.
Another retailer that has had its fair share of difficulties in the last 12 months has been ASOS, with its share price down sharply since the beginning of 2018, with a sharp fall in December after the company slashed its full year sales growth target from 20-25% to 15% on the back of heavy discounting weighing on its margins, which were halved from 4% to 2%.
This morning’s interim numbers for the 6 months to the end of February were slightly better than was expected at the end of last year, with total sales rising 14%, but nonetheless still point to an extremely competitive sector.
Profits before tax were down sharply from £29.9m in the same period a year ago, to £4m now, however the company is also investing heavily in its EU and US operations which has meant that the company has gone from a net cash position a year ago, to net debt of £37.9m. This expenditure is expected to reduce over time as the company’s distribution hubs in Berlin and Atlanta become more efficient in terms of staffing and automation.
The company kept its full year guidance levels of full year sales growth of 15% unchanged.
It’s also been a good day for Ted Baker, which has had its fair share of problems in recent months, with this morning’s announcement of a joint venture with Shanghai LongShang Trading company, which is expected to enhance the Ted Baker brand into mainland China, Hong Kong and Macau and open up retail concessions as well as an online presence into what is likely to be one its biggest markets for years to come.
Management have said that they expect the joint venture to marginally enhancing to this year’s full year profits, assuming that it is signed off by Chinese regulators. The total cost to Ted Baker is expected to be in the region of £6.5m, but would be small change in comparison to the number of potential new customers in the China market.
In conclusion while it is safe to assume that UK retail has its challenges, Brexit notwithstanding, there is room for optimism when seeing the sorts of performance from the likes of the companies above.
At times Brexit is a convenient excuse for retailers to gloss over poor performance, or a lack of clear direction in terms of product mix, and an ability to adapt to a changing retail environment.
A strong on-line presence, decent products as well as competitive pricing, and an ability to adapt to changing retail conditions, has seen the companies above look past short term share price volatility and post numbers that will hopefully be sustainable over the longer term, and thus help drive further gains in the share price.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.