Retail - Where to from here?
At first sight retailers have faced a situation where sales have held up reasonably well: in June and July retail sales were relatively strong, belying an expected slowdown in the consumer-led boom. However, the figures for August suggested that they might be losing a bit of positive momentum when total retail sales volumes were flat on the month and non-food sales fell by 0.6%. The most recent evidence comes from a CBI distributive trades survey which was released at the end of September and showed a particularly good month, but many participants still have concerns relating to the outlook for next year.
On the negative side (for spending) there is now little doubt that the UK general public is undergoing a re-think of priorities in the light of the recession: the household savings ratio, which is the proportion of disposable income that is saved, has jumped from its low of -0.5% in the first quarter of 2008 to 5.6% in the second quarter of this year. This is still significantly below its long-term average of close to 8%, thus there is some way to go yet, but the quicker it returns to a more “normal” level, the quicker consumer spending can start to recover. This ratio will come under upward pressure, however, as borrowing continues to fall. The consumer continues to face headwinds in the form of rising unemployment, potential fiscal tightening and continuing tight lending conditions. The low return on savings has relatively little significance, with people saving due to worries about job security and falling wealth, rather than the returns produced. Overall saving has further to rise and this will have a negative impact on any consumer recovery.
This does not make easy reading for anyone involved in the retail sector. Once far more significant, it now accounts for only 1.74% of the FTSE All-Share and there are a mere five stocks in the FTSE 100: Burberry, Home Retail Group, Kingfisher, Marks and Spencer and Next. Recent statements show a variation in the fortunes of the sector, but most of the larger groups appear to be faring better than analysts’ predictions. The discount retailers have held up relatively well, but the niche retailers have found it hard going and on-line retailing continues to grow in significance. There are a few things to be aware of when considering the retailers’ fortunes: firstly last year’s trading was often fairly weak making comparisons more favourable, the larger groups have had good scope for cost cutting and the last phase of the economic cycle – the consumer slowdown – has yet to really be felt. In light of this it is difficult to believe that the general retail sector will not face a challenging environment for the foreseeable future and while some areas will always fare well (witness Primark’s success), for any stocks which are on relatively demanding ratings it is certainly worth considering taking profits.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of Cunningham Coates Stockbrokers.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Cunningham Coates Stockbrokers is a trading name of Smith & Williamson Investment Management Limited. Authorised and regulated by the Financial Services Authority.