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Schadenfreude: don’t journalists love it? There was plenty of glee in the papers last week when Phillip Green unveiled some rotten results from Bhs chain. Pretax profits plunged more than 60% to £42m as a result of what Green called “stupid and fundamental mistakes”.
It’s unlikely Green cares very much about the snide headlines. After all, his empire has made him – or technically, for tax purposes, his wife – far richer than any of those doling out judgement on him will ever be. Whether he achieved it through being a great retailer or simply through clever financial manipulations such as loading up Bhs with debt is irrelevant as far as his bank balance goes.
Some may wonder whether this is all a fuss about nothing. After all, Bhs is a private company, so there’s no shareholder base to worry whether the King of the High Street’s crown might be slipping. But the results are still important – because they show how bad things could get for the rest of the retail sector…
Bhs’s problems are at least partly self-inflicted. Green admits that the company had got its merchandise wrong in many areas, notably in the crucial womenswear market. The staff responsible for this mess-up have fallen – or more likely been pushed – onto their swords and a new team installed.
But tough competition from the rest of the high street has also been a major contributor. What must really sting for Green is that this slump comes as Marks & Spencer – which he tried to buy two years ago – continues to beat expectations. Other firms such as budget fashion chain Primark are also doing better than Bhs. In other words, he’s being squeezed on both style and price.
That may sound as if it’s all Bhs’s fault for failing to keep up with its rivals. But equally possibly it’s because the chain was ahead of the pack in building profits at the start of the retail cycle and is simply hitting the buffers sooner than the rest. The problems that it’s experiencing now may well be the same problems that other retailers run into a little further down the line.
Overall, the retail market is growing very slowly. To generate major revenue growth you need to steal sales from your competitors – thus M&S’s gain is Bhs’s loss. But the problems go further than that. Because competition is so tough, it’s been very difficult – certainly in recent years – to push up prices to boost margins. Prices are falling or static across much of the sector.
And there’s little scope for trimming fat within Bhs – Green’s cost-cutting programs must have squeezed pretty much every spare penny out by now. Other chains that have been less quick to prune may still have some scope to improve margins this way. But at the same time, costs in the sector have been going up – principally because of higher energy and utility prices (this alone accounted for £12m of the fall in Bhs’s profits).
This kind of market is something of a zero-sum game. For Bhs to do better next time, someone else will have to do worse. Green is now planning to invest at least £100m in revitalising the brand. If he pulls it off, them someone else will have to suffer – maybe next year we’ll be talking about M&S’s recovery running out of steam.
And that’s assuming that the market remains in the state that it does. If a US-led slowdown spreads over here, UK consumers are likely to start feeling less affluent and spend less in the shops. That’s particularly true if the knock-on effects finally burst Britain’s housing bubble, which has been making shoppers feel so wealthy that they don’t mind spending beyond their incomes. In those conditions, plenty of retailers are likely to find themselves in severe trouble.
With that in mind, those rushing to bury Green might be advised to wait a while – and probably longer than the two weeks until Arcadia, the other part of his business, releases its numbers. It will be 12 months or so before we know whether he really has lost his touch or whether this is a warning sign for other retailers.
Turning to the markets…
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The FTSE 100 closed 10 points lower on Friday, ending the week at 5,960. A reversal amongst commodities stocks saw the index fall back from a morning high of 6,002. Building materials supplier Hanson was the the biggest gainer for the sixth day running, with analysts indicating the group was still a ‘buy’. For a full market report, see: London market close
In France, stocks also retreated from earlier highs following the weak start on Wall Street. The Paris CAC-40 closed flat at 5,250. However, in Frankfurt the DAX-30 closed 15 points higher at 6,005.
On Wall Street, stocks closed lower but the major averages all logged solid quarterly performances with the Dow Jones achieving its best third-quarter performance in 11 years. The industrial index was down 39 points on Friday, ending the week at 11,679. The S&P 500 was 3 points lower, at 1,335, and the Nasdaq was 11 points lower at 2,250.
In Asia, the Nikkei climbed 126 points to close at 16,254 today.
Crude oil last traded at $62.95, whilst Brent spot was at $61.30 in London.
Spot gold was last quoted at $601.40.
And shares in online betting companies PartyGaming, SportingBet and 888 all dived today following new curbs on their US activities. The legislation, passed by Congress on 30 September, will make it unlawful for credit card companies to collect payments from online gaming sites, effectively wiping out US revenues. It is expected that the bill will be signed into law in the next fortnight. Shares in the largest online gambling company, PartyGaming, fell by as much as 65p in London this morning.
And our two recommended articles for today…
Is this new investment trend bigger than the internet?
– We all know how it ended, but if you had the chance to go back and invest in the internet c. 1997, would you do it? Just think of how much the early entrepeneurs made, before the bubble burst. Well, Jeff Clark of the Daily Wealth thinks that a certain sector has as much potential now as the internet did back then. To find out what it is, read: Is this new investment trend bigger than the internet?
Are investors warming to natural gas?
– Despite rising demand, natural gas production growth remains static. But there are still reserves which remain untapped. To find out why sentiment on natural gas – which has been bearish of late – could be about to change, see: Are investors warming to natural gas?