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UK retail sales flash warning signs for high street in H2

15:16, 22nd July 2022
Victor Parker
Vox Newswire
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UK retail sales figures for June testified to the slowdown of the British economy as the cost of living crisis intensifies. Soaring inflation, especially felt in fuel and energy prices, has limited British consumers' spending power and prompted many to remain frugal. 

Despite the Government's comprehensive £37 billion package aimed at assisting the most vulnerable households with cost of living and energy cost increases, today's retail sales painted a gloomy picture that will most likely impact retailers' bottom lines in H2.

June retail sales

Retail sales volumes decreased only 0.1% in June, less than the 0.4% consensus, and less than the 0.8% slowdown in May - the highest since modern records began in 1988. While this appears to be good news on the surface, most of the improvement can be attributed to increased spending during the Queen's Jubilee long weekend, which resulted in a 3.1% increase in food sales. 

In other areas, the data revealed steep declines with clothing sales down 4.7%, household goods sales down 3.7%, and non-store sales (mostly online retailers) down 3.7%. Most notably, fuel sales declined 4.3% in June after petrol and diesel prices hit new record highs and drivers cut back on mileage.

Therefore, June's result is unlikely to establish a positive trend, especially as economists are now forecasting as much as 12% inflation in October. The Resolution Foundation has said inflation for the poorest tenth of households was in fact already at 10.6% as they spend a higher percentage of their incomes on energy and food. Even with government aid, these households will face increased pressure in the coming months as wages have risen significantly slower than prices.

Even more pain

While British GDP expanded 0.5% in May MoM, economists are forecasting a contraction in Q3 as households' disposable incomes shrink. Inflation hit 9.4% in June, the highest since February 1982. Additionally, the USD has hit a 20-year high with the GBP/USD exchange rate now at $1.19, the lowest since the market meltdown of March 2020 and not far from 40-year lows.

All of these factors are putting pressure on the economy and consumers' purchasing power as imports become more expensive. As a result, the BOE is expected to follow the ECB - which raised rates for the first time in over a decade this week - and the Federal Reserve, and raise rates by 50 basis points at its next meeting.

While the Queens' Jubilee weekend positively affected sales of supermarket chains, other retailers have seen drops in demand. The ONS reported that online sales had fallen to 25.3%, their lowest level since the start of the pandemic, and continuing a downtrend since their peak at 37.4% in February 2021.

Adding to that, the GfK consumer confidence index has now dipped to its lowest level since records began in 1974, beating by one point the previous lowest score recorded just prior to the financial meltdown in 2008. Retailers are therefore going to be pressured to absorb as much of rising costs as possible, and minimise margins in order to retain customers, all while managing supply chain pressures and demands for higher wages from employees.

How are major retailers faring?

In the midst of all this gloom, how have retailers' financial accounts fared? Not too badly so far it seems. Just today and yesterday, five major retailers updated markets with positive financial data and forecasts:

JD Sports, Britain's largest sportswear retailer, reported sales for the first 5 months of 2022 increased 5% YoY on a like-for-like basis, and projected pretax profit for the year ending January 28 2023 to be "in line with" FY 2022 performance. Sports Direct owner Frasers  performed even better - its shares jumped 27% after it revealed that  its FY22 profit and revenue increased substantially as it recovered from Covid-19. Not counting the acquisition of Studio Retail finalised in February, pretax profit increased to £366.1m from only £8.5m last year.

Howden Joinery, producer of kitchen and joinery products, said its H1 pretax profit increased 21.6% YoY to £145m. CEO Andrew Livingston said the company was managing inflationary and supply chain pressures effectively, and remained on track to meet full-year expectations. Howden Joinery also raised its dividend 9.3% from 4.3p to 4.7p.

Dunelm Group, a major home furnishings retailer, similarly reported a 16% increase in sales to £1.55b, though sales fell 6% YoY in Q4. Dunelm said it expected full-year profits to come in slightly ahead of expectations. CEO Nick Wilkinson commented on the current climate: "The macro outlook remains uncertain and we cannot predict exactly how consumers will respond to the increasing pressures on their finances. We are currently seeing customers adapt to this environment in their own ways, utilising  the breadth of our offer and price points across homewares"

However, not all retailers have fared so well. Hotel Chocolat saw its shares plummet 44.89% to 129.5p on warning of lower sales growth and profit in the year ahead, following a decision to close all US stores and materially reduce its Japanese joint venture to focus on what it described as "lowest-risk strategies" in the face of macro-economic concerns. 

View from Vox

There are a few things to note about the above results. Firstly, they speak to past performance, including the post-pandemic bounce-back period. While the companies expressed generally positive outlooks, they also recognised the current challenging environment. And full-year forecasts could easily change if the cost of living crisis continues to deteriorate in the coming months.

Moreover, they have not been spared from the bear market in equities. With the exception of Frasers, all are down roughly 30-40% YTD. They also do not represent the broader retail sector, including smaller businesses that may not be able to absorb costs and maintain competitive prices as well as larger players.

Until clear signs of recovery from the cost of living crisis begin to emerge, investors would be wise to remain conservative on retail.

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The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. Vox Markets may receive payment from companies mentioned for enhanced profiling or publication presence. The writer may or may not hold investments in the companies under discussion.

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