The Christmas reporting season for the retail sector is just getting into full swing, but already some trends are emerging.
Both Next Marks and Spencer have reported sales figures which impressed (in fact, M&S has reported the first quarterly underlying sales growth in the UK for the first time in more than two years) but both have seen their shares prices retreat.
In the case of M&S, which released its update on Wednesday morning, the fall has been quite marked.
Now, there are some company specific gripes about the M&S update: namely that some analysts expected further upgrades to gross margin guidance and also a bigger in improvement in like for sales. Some were expecting as much as 1.8% over the 13 weeks to Decemeber 26.
But it also seems that the market has decided that 2009 was about as good as it will get for the retail sector and now is time to book some profits. (Note the FTSE All-share General Retail index rose 76 per cent last year.)
Indeed, Simon Wolfson, the boss of Next, was quick to identify some of the negative factors facing the consumer on Tuesday.
From the FT:
Simon Wolfson, chief executive, warned that conditions in 2010 may be worse than in the past six months as the need to cut Britain’s debt through higher taxes or public sector job losses could jeopardise a consumer recovery. “We are not looking at disaster. Talk of some great double dip is overdone. But at the same time, it would be very difficult for the consumer economy to recover robustly, and at the same time for the government deficit to be meaningfully [reduced],” he added.
And the Guardian:
Can it last? Wolfson fears not, citing tax increases, possible interest rate rises and possible reductions in employment as government spending is cut. On the other hand, even his “cautious” view imagines Next returning a similar level of profits. That, though, says more about Next, which is a class act. Wolfson is right on the basic point – tougher times for most retailers were delayed but will arrive eventually.
These points, of course, were also made by the retail team at BofA Merrill Lynch on Tuesday, as they downgraded several stocks including M&S and Tesco.
With what feels like a better than expected Christmas season and with stock well controlled, there is likely another leg to positive earnings surprises. That may give the UK general retail sector one more ‘shot in the arm’.
However, the difficult macrobackdrop to the UK, aligned with it being an election year makes it difficult for us, fundamentally, and in terms of likely investor asset allocation, to be bullish on the UK stocks, particularly those with a more discretionary bias.
In part, the reason for the relative sales strength has been the degree of fiscal and, particularly, monetary stimulus in a country with a highly indebted consumer geared into the property/mortgage market. Hence, the UK consumer’s recession has effectively been delayed for a year but with interest rates unable to go lower and with tax rises starting to come through, momentum is likely to be lost.
And who are no doubt feeling pretty smug this morning.
Related link:
M&S returns to growth after two years – FT