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A big week for retail with Marks and Spencer’s in focus

The Christmas period is always a key time of year for retailers and how they fare can always be a decent bellwether to how they perform for the rest of the year.

Last week high street bellwether Next underwhelmed the market with a disappointing Christmas trading period. The company downgraded its profit forecasts for 2017 while warning of prices rises as the effects of a lower pound shrink margins.

This week we’ll get further colour on this narrative with a whole range of trading updates from retailers ASOS, Debenhams, Marks and Spencer and Primark amongst others, and there is a worry that the boom seen in retail sales, has been at the expense of retail profit margins.

The latest trading update from Marks and Spencer, which has continued to struggle with its general merchandise business for several years has been in the shadow of Next’s on-line business model for some time now.

Last week’s profits warning from Next would appear to suggest that the good times seen since 2008, when Next share price was 1,000p and went as high as 8,000p in 2015, appear to be firmly in the rear view mirror. Since those heady days Next share price has halved to trade near 4,000p and raises the question as to whether we could see further declines in the short to medium term.

Management has cited a continued uncertain outlook as a result of the recent Brexit vote, for the current woes, however the declines in the Next share price predated the Brexit vote, and would suggest that the company’s problems are more deep rooted, whereas Boohoo.com, another clothing retailer has seen its share price triple since the beginning of last year.

In the same period of time while Marks and Spencers fortunes has diverged from Next, and its share price remains well below the levels seen at its peaks in 2007, its declines have been cushioned by the fact it has a more diverse product range than Next, with a very popular food offering.

M&S’s saving grace given its clothing struggles is its food division which has consistently outperformed the rest of the business, and which the company appears to be leveraging up on with the opening of new Food Halls purely tailored to the sale of its grocery ranges.

With the share price continuing to struggle just above 300p, pressure is likely to grow on new CEO Steve Rowe as he restructures the business by closing unprofitable stores and focussing on areas that deliver value to the bottom line. Key amongst this has been food which has consistently outperformed and the opening of larger food halls suggests that this strategy is well on course with big stores opening in Tonbridge, Barnes and Chichester quite recently.

The problem that Marks and Spencer’s has had over the past few years and now latterly Next, has been the increase in competition in the retail space, with companies like ASOS, Boohoo.com and Primark eating into their market share.

This week’s trading update could well surprise to the upside for Marks and Spencer given recent retail sales data which showed food sales did well in the lead-up to Christmas. A decent performance here along with evidence that the general merchandise division is starting to show signs of a turnaround may well be the catalyst to drive the share price higher and keep the heat off new CEO Steve Rowe.

The big concern now is that this deflation premium, which has been achieved on the back of lower commodity prices and increased competition could be about to come to an end as a lower pound starts to drive up import costs. 

Last year’s Marmitegate saga was the first indication that higher import prices were starting to see some supply chain pass through, and despite a strong last quarter for UK retail sales, the next two weeks for UK retailers are likely to act as a key bellwether for UK consumers as they report on how well they have done in the pre and post period Christmas trading period.

It’s becoming increasingly clear that the retail space is changing rapidly, John Lewis pre-Christmas numbers once again showed decent sales growth, building on the back of a strong Black Friday performance, reflecting the fact that if the product is right then the numbers should take care of themselves.

In this context this week’s trading updates from Marks and Spencer, Tesco and John Lewis should give us further insight about the likelihood of a slowdown in consumer spending as we head into 2017, and whether the warnings from Next are unique to their business model, or the shape of things to come.

Tesco’s announcement of 1,000 job losses this week speaks to the pressures on retailers from slimmer margins as competition from Aldi and Lidl continues to squeeze the capacity to pass on price increases.

Given all of this it would be perfectly rational for UK consumer spending to slow down in the coming year simply because it has to; annual retail sales growth in excess of 6% is unsustainable on any measure.

Since 2004 we’ve seen annual retails sales growth breach 6% on just three occasions, and on each occasion we saw a sharp slowdown, back to levels of around 2.5%. Using Brexit as an excuse is likely to become a catch all to hide an inability to adapt to a constantly changing retail environment, and it really needs to be called out.

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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.