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The Christmas shopping has only just begun in earnest, and already the festive season has seen its first casualty.
Predictably enough, it was Woolworths (WLW). The company issued a profit warning yesterday, saying that like-for-like sales were down 6.5% during October and November. Chief executive Trevor Bish-Jones blamed ‘aggressive’ pricing by rivals and low sales of CDs and DVDs.
As retail analyst Richard Ratner of Seymour Pierce said: ‘It is extremely unusual for a retailer to come in with a profit warning at this stage.’ After all, there’s still three shopping weekends to go until Christmas – many would have been tempted to hold on and hope for the best.
So is this a harbinger of a very unmerry Christmas for the retail sector?
Just as one swallow does not make spring, so one profit warning is not a recipe for carnage on the high street.
As James Harding points out in The Times, it’s frankly a miracle that Woolworths even still exists. Anyone who has seen the shop or tried to buy something in it can’t be blamed for wondering – what is it actually for? It sells an odd mix of random electronic goods, sweets, CDs, games and DVDs, but doesn’t do any one thing particularly well. Even WH Smith (SMWH) – another slightly anachronistic chain – has a more coherent identity.
So it’s no wonder that Woolies is suffering. You can get DVDs and electrical goods cheaper and more conveniently in supermarkets or online; CDs are a dying format, crushed by the MP3 player; and almost all of its products are subject to rampant price deflation.
At Tesco (TSCO), on the other hand, things are going rather well. Like-for-like sales in the three months to November 25 rose 5.6% (leaving analysts mildly disappointed that the juggernaut had failed to beat City hopes, for once), helped by double-digit growth in non-food sales as it continues to swipe market share from the likes of Woolworths. But another interesting detail was that (stripping out petrol) Tesco also saw prices rise by 0.8%, fuelled by the higher price of fresh produce and meat.
So is all the talk of a miserable Christmas just hot air? Well, let’s not be too hasty here. After all, so far we’ve only seen results from the weakest high street chain, and the UK’s most powerful retailer. It’s hard to extrapolate a bigger picture from either of these two as they are at such extremes.
A more telling indicator was HSBC’s (HSBA) third quarter results. The banking giant warned that in the third quarter revenue growth had slowed, hurt by growing bad debts both in the UK and in the US. In Britain, the group said that the rising trend of bankruptcies and individual voluntary arrangements (IVAs) – already at record levels – ‘looks unlikely to abate in the medium term.’ Meanwhile, default rates in the US have increased since it issued a trading update, just three weeks ago, showing how rapidly the US situation is deteriorating.
HSBC has deliberately slowed its rate of lending growth because of the rise in bad debts, which suggests it will become more difficult for troubled Western consumers to get credit. And it’s this trend that points to a tougher Christmas ahead.
Consumers are facing high utility bills, rising food bills (as Tesco’s results show), higher petrol prices (after good old Gordon Brown uses his lovely new greenlight on green taxes to remove the freeze on fuel duty today), and rising mortgage costs. It’s no wonder that so many of them are going bankrupt or taking out IVAs.
So far, strong revenues elsewhere in the world and in investment banking have helped banks to gloss over their problems with the UK consumer, and allowed them to pretend that there’s no need to worry about tightening credit conditions. But now that bad debts and a weak housing market are hammering the US consumer, the banks are getting scared. And as they cut off the UK consumers’ credit lifelines, the number of bankruptcies, IVAs and mortgage repossessions will continue to rise even faster.
That’s bad news for banks – and bad news for the UK high street. We don’t think either sector is set for a Merry Christmas – but New Year will be a lot worse.
As we mentioned briefly above, none of this will be helped by the Pre-Budget Report today – the Chancellor has a veritable smorgasbord of tax-raising options to choose from, and you can bet he’ll not miss the opportunity to try every single one.
Turning to the wider markets…
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In London yesterday, the FTSE 100 closed 36 points firmer, at 6,086, thanks to strength in the oil and mining sectors. Higher copper and nickel prices saw Antofagasta top the leader-board, with Anglo American and Kazakhmys also performing well. Retailers Wm Morrison, J Sainsbury and Tesco were among the day’s biggest fallers, after reports of slowing growth from the latter dragged the whole sector down. For a full market report, see: London market close
Elsewhere in Europe, shares were boosted by strong service sector data from the US. The German DAX-30 closed 77 points higher, at 6,372. In Paris, the CAC-40 ended the day 63 points higher, at 5,359, with drug stock Sanofi-Aventis sharply higher following the publication of positive results for trials of diabetes drug, Acomplia.
Across the Atlantic, the Institute of Supply Management survey of the service sector showed stronger-than-expected growth, boosting hopes of a soft landing for the economy. The Dow Jones ended the day at 12,331, a 47-point gain, with Coca Cola the day’s strongest performer. The S&P 500 closed 5 points higher, at 1,414, whilst the tech-rich Nasdaq closed at 2,452, a 4-point gain.
In Asia, the Nikkei closed down 37 points, at 16,265.
Crude oil was slightly higher, at $62.54, and Brent spot was unchanged at $63.96 a barrel this morning.
Spot gold fell over $5 to hit a low of $637.50 an ounce on Wednesday.
And cable television company NTL abandoned its bid for broadcaster ITV today, stating that ‘acceptable terms’ wre unlikely to be reached. In a month of wrangling, ITV rejected NTL’s £4.73bn bid whilst rival BSkyB acquired a 17.9% stake in the broadcaster. ITV shares were as much as 1.3% lower in London this morning.
And our two recommended articles for today…
Why UK mortgage lenders now have even more risk to manage
– As house prices continue to rise, even mortgage lenders who hand money to those with poor credit history profit. But what will happen when the property market stops going up? John Robson and Andrew Selsby of the Onassis Newsletter use the example of Kensington Group to examine the issue. Click here: Why UK mortgage lenders now have even more risk to manage
Tracing dollar trouble back to Bretton Woods
– The 1944 Bretton Woods agreement was intended to smooth out economic conflict after the second world war. However, the actual outcome – replacing the gold standard with the dollar standard – has caused plenty more problems. To find out more about Bretton Woods, the gold standard and why the dollar is under threat, read: Tracing dollar trouble back to Bretton Woods