At the end of last year, there was some optimism that for all the headlines in 2019 about various high-profile failures, the worst for general retail was largely in the rear view mirror.
While some of these failures were self-inflicted, retailers’ inability to carry on trading appears to owe more to changing consumer shopping habits, as more people shop online, as well as rising costs and outdated business models.
The collapse into administration of the likes of like Forever 21, BonMarche, Links of London, LK Bennett and Patisserie Valerie, along with House of Fraser, Debenhams and Mothercare, spoke very much to this changing retail landscape, however there were also a number of retailers that managed to thrive in spite of the challenges facing the sector.
This was reflected in the performance of the FTSE 350 general retailers’ index in 2019, which had a very positive year, finishing up by 35%, driven largely by decent gains from the like of Next, JD Sports, Sports Direct and Dunelm. These helped offset underperformance on the part of Marks & Spencer and Kingfisher, however it’s also important to note these gains came off the back of a seven-year low for the sector.
If ever there was a feeling that things couldn’t possibly get any worse, there was certainly optimism that while some retailers were still struggling, we probably weren’t going to see a revisit of the lows of 2018.
Pandemic proves final straw
As 2020 unfolded we soon began to realise how wrong that assumption was going to be, as the retail sector then had to contend with a black swan event to rival all black swans, as the coronavirus pandemic swept across the globe.
The pandemic, along with government-mandated shutdowns of the economy, has ravaged the retail sector even further, and while the furlough scheme has mitigated some of the worst damage, the events this year have proved to be the final straw for a lot of retail businesses which were just about hanging on. The pandemic has accelerated a change that was already in process, and in essence created a scorched-earth effect on the sector, with big box retailers feeling the pinch more than most.
In March, the FTSE 350 general retailers’ index plunged back to levels last seen in 2009, in the aftermath of the financial crisis. There has been a decent rebound since then though, with the prospect that all of this year’s losses could be clawed back.
FTSE 350 general retailers’ index chart (2020 YTD)Source: Bloomberg
Now that the ravages of the pandemic appear to be receding, and with a vaccine programme starting to be rolled out, the scope for a ‘green shoots’ type of recovery already appears to be moving into place.
That doesn’t mean that there haven’t been real-world consequences as a result of this year’s events, in terms of thousands more job losses for a sector that is likely to see further consolidation in the weeks and months ahead. There is little doubt that the government furlough scheme, along with the temporary reduction in VAT and business rates relief, created a bridge for a lot of retailers to walk over, and helped to retain staff that they would otherwise have been forced to let go, due to a lack of cash flow.
What’s next for the UK retail sector?
The big question now as we look ahead to 2021, is what type of retail sector are we likely to be left with, with the loss of so much high-street store space? The pandemic finally called time on the likes of Arcadia Group, owner of Top Shop and Dorothy Perkins, while Debenhams finally appears to have gone the way of Woolworths, with the potential loss of a combined 25,000 jobs.
Other businesses that have gone into administration have included Harveys, Jack Wills, Cath Kidston, while we’ve seen job cuts at Marks & Spencer, John Lewis, Burberry, Boots, Clarks and WH Smith, among others.
As we look at the retailers that have outperformed, it’s notable that they all have not only have an online presence, but also a high street presence as well, albeit with a fairly small, localised footprint.
Best general retail performers 2020 chartSource: CMC Markets
DIY boosts Kingfisher share price, Next share price struggles
It has been particularly notable that after a disappointing 2019, Kingfisher’s share price has enjoyed a resurgence this year, largely as a result of its B&Q and Screwfix businesses, as lockdowns created a DIY boom. The fact that DIY retailers, as well as garden centres, were allowed to stay open during the lockdown also helped.
Next’s share price got absolutely clobbered early on in the pandemic, as sales of full price clothing fell -52% in the three-month period from the end of January to April. This improved to a decline of -28% in Q2, which was a slightly better-than-expected performance, with its online and warehouse division starting to return to normal capacity. Despite this collapse, first-half profit came in at £9m when the company reported in September, with full price sales down 33% on a year ago. This is still quite a miss when you consider that at the beginning of the year, Next was expecting pre-tax profit to come in at £734m. Full-year profit guidance was nudged higher, with an expectation that would come in at £300m, though this was predicated on there being no further lockdowns. That is no longer the case, however this could be offset by warehouse picking capacity upscaling which should improve the online part of the business, as well as delivery times, which had been suffering due to the extra workload.
Frasers’ share price remains resilient
Mike Ashley’s now renamed Frasers Group has also managed to hang on to a lot of its share price gains from 2019 after resolving last year’s Belgian tax claim, and also managing to ride out the worst of the pandemic shutdowns when the Frasers share price plunged towards 2019 lows in March. CEO Mike Ashley has continued to lurk in the background, looking to pick up any bargains from a retail landscape that has led to weaker retailers coming under increasing pressure from reduced cash flow. Only a few weeks ago, Frasers upped its stake in Mulberry to 37% at a cost of £6.45m, with a view to potentially making a formal offer, while Ashley also invested £97m in Hugo Boss in the summer. Frasers also moved forward on its move for Game Digital during the summer, a deal which was first announced in June 2019.
In August, the company announced it would be investing £100m in improving its digital strategy, following an 18% fall in pre-tax profit to £117.4m. Ashley has been highly critical of the UK government’s guidance over the period of the pandemic, calling its handling risible, while also having to fend off media criticism of working conditions in its warehouses.
AO World share price surges
Online electrical retailer AO World is also a big winner, with the AO World share price surging over 300%, while the Pets at Home share price has risen over 30% as consumers bought pets to give themselves company during the isolation of lockdown.
UK retail sales have also proved to be remarkably resilient, and are now back at an annualised 5.8%, having recovered from the March and April collapse to -22.6%. But with unemployment levels starting to rise across the board, as job losses in retail, airlines and other hospitality sectors start to trickle down, the recovery seen since May could prove hard to sustain as we head into 2021.
It’s important to remember that the various tier restrictions are likely to remain in place for quite some time, which means spending patterns may be more subdued heading into next year, and there’s always the possible disruption from the end of the Brexit transition period, post 1 January.
Luxury retail brands struggle
There are still notable areas of weakness despite the resilience of the FTSE 350 general retailers’ index, if you look at some of the more boutique brands. For example, Burberry’s share price is down 20%, Ted Baker’s share price has fallen 60%, and Superdry’s share price is 50% weaker.
On the plus side we have the ASOS share price, which is up over 25%, while Boohoo’s share price has had a rollercoaster ride this year, down over 40% in March before recovering to be 35% higher in June, before giving up all of those gains as we head into year end.
Online vs luxury retailer share prices chart (2020 YTD)Source: CMC Markets
After a disappointing 2018, the UK retail sector recovered a lot of lost ground in 2019, and while it looked as if 2020 was going to be an absolute horror show, the sector has managed to rebound to some extent That’s not to say the sector won’t face further challenges ahead, but it’s notable that the retailers that have performed better have been those that have been able to adapt to the quickly changing retail conditions characterising this year.
The coronavirus pandemic has merely served to speed up a trend that was already in motion, and the key challenge going forward for those retailers whose share prices have struggled, is how they adapt their business models to this changing paradigm.
Could we see a change of fortune for the likes of Ted Baker, Superdry and Burberry? Both Ted Baker and Burberry have significant exposure in Asia markets, particularly China, which has so far managed to avoid a covid-19 second wave, and where the Chinese consumer is slowly regaining confidence after its own February 2020 lockdown.
Ocado deal aids M&S share price
In terms of general merchandising, the M&S share price still has some way to go, however its deal with Ocado is already paying dividends on the food front. It’s quite likely that we will probably see further store closures, as M&S looks to lower its cost base. It could do a lot worse than take a leaf out of US retailers books, like Target, who have reaped huge benefits from investment into its digital operations, with variations on click-and-collect, kerbside pickup and other digital innovations. One thing M&S could do is extend its Ocado product catalogue availability to general merchandising.
It’s also worth keeping an eye on Frasers Group, as CEO Mike Ashley looks to get his fingers into a variety of different pies. He seems to be moving upmarket now with stakes in Hugo Boss and a move into Mulberry.
UK retail companies face challenging year
Whatever you think of the boss of Frasers Group – and Ashley does ruffle feathers – he certainly speaks his mind, in the hope that seemingly economically-illiterate politicians will look at new ways to try and deal with a problem that needs to be addressed more than ever, as a result of the firestorm that has hit the high street this year. Rising and inequitable business rates, along with higher staffing and safeguarding costs as a result of the pandemic, have eaten into margins even more than was the case in 2019, when most people were more concerned with the Brexit fallout.
Now we have to contend with the end of the Brexit transition period as well as the economic challenges from the slow march out of the pandemic. The retail sector in 2021 is likely to face serious challenges and changes as we look to come out the other side of the pandemic, with the prospect of higher unemployment levels, and the changing nature of a new EU-UK trade relationship.