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I know we’ve mentioned retailers already this week (see: Why there’s far worse to come for retailers), but after yesterday’s carnage, I think it’s worth taking another look.
After all, it’s not every day that a single stock’s results can wipe 10% off the value of an entire sector.
But then, as the breathy voiceover in the adverts might put it – these weren’t just any retailer’s results – they’re Marks & Spencer’s (MKS) results…
Yes, it seems that having a bevy of supermodels selling your products, and the closest thing the FTSE 100 has to a national treasure – much acclaimed and freshly knighted chief executive, Sir Stuart Rose – leading your company, is simply not enough to defend against the fall-out from the credit crunch.
The company reported that like for like sales fell by 2.2% during the 13 weeks to December 29th. Food sales fell 1.5%, and general merchandise by 3.2%. That was worse than analysts had expected – in fact, as Damian Reece in The Telegraph points out: “this was a profit warning in all but name”, as demonstrated by the near-20% fall in the company’s shares.
Sir Stuart was clearly not chuffed. And little wonder – the share price is now barely above the 400p that Top Shop tycoon Philip Green offered to pay for M&S two years ago. In fact, as Jeff Randall pointed out yesterday, M&S is now worth less than Mr Green offered for it (because after Sir Stuart took over, M&S bought back about a third of the shares in the company, so there are a lot fewer in issue now).
Marks & Spencer has problems of its own
Anyway – Sir Stuart pointed out that sales volumes were actually up – the trouble was they’d had to cut prices by 6% to drag people into the shops. He immediately blamed problems in the wider economy and Northern Rock. Apparently a consumer survey he undertook before Christmas showed that shoppers “were going to spend less, they were worried about 2008 and they were worried about the security of the money in the bank.”
It’s all true. But M&S does have problems of its own. The food is very expensive and easily substituted for cheaper products – as my colleague Jody Clarke pointed out to me yesterday, one microwave meal is much the same as another if you’re suddenly worried about budgeting. And M&S isn’t a supermarket – instead, it’s somewhere that people use to top up the shopping they’ve done elsewhere, perhaps with some premium items.
The more successful John Lewis’s Waitrose has a far more upmarket brand, and its customers are more likely to resist trading down for longer than M&S customers.
But let’s not worry too much about the differences between individual retailers. The truth is, they’re all going to take a pounding eventually. Despite all the bad news, this isn’t something that most people can quite believe yet. Things have been so good (on the surface at least) for so long, that people are already looking for buying opportunities, thinking that this is as bad as it gets.
Goldman Sachs says US now in recession
It’s not. Just look at the US. A couple of years ago, just as subprime was starting to rear its head, everyone said it would be a contained problem. Even last year, there were plenty of analysts, experts and politicians saying that the housing market was bottoming out and that the malaise wouldn’t have an impact on the wider economy.
And now Goldman Sachs has become the second US investment bank to announce that the US is now in recession – or will be shortly. Its chief US economist Jan Hatzius reckons GDP will shrink by 1% in both the second and third quarters of this year. Rising unemployment is the bank’s big worry – the unemployment rate has now risen by more than a third of a percentage point from the low point for this cycle.
“Historically, this has invariably been associated with recession, typically starting immediately and almost always within three months.” But even now, Hatzius is still too optimistic. He thinks this will be a mild recession, even while at the same time he’s saying that house prices will fall by 20% to 25% from their peak, corporate profits will fall by 7.5% after tax, and unemployment will be 6.25% by the end of the year.
Let’s just run through this again. The US economy has been propped up by consumer debt, to an extent never seen before in history. That prop has just been kicked away from beneath it and isn’t going to come back until at least a big chunk of that debt has been paid off. And the UK’s the same.
We’ve had the biggest boom in history – it’s only reasonable to expect a bust of similar proportions.
Turning to the wider markets…
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Retailers sink FTSE
In London, retailers including Next, Carphone Warehouse and Home Retail Group joined M&S to lead the blue-chip FTSE 100 index into the red yesterday, to end the day down 83 points at 6,272. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 fell 60 points to end the day at 5,435. And in Frankfurt, the DAX-30 was 67 points lower, at 7,782.
Across the Atlantic, the Dow Jones rallied late in the day as bargain-hunters stepped in and went on the end the day 146 points higher, at 12,735. The tech-rich Nasdaq finally managed to close in positive territory after eight days of losses, adding 34 points to close at 2,474. And the S&P 500 was up 18 points, at 1,409.
In Asia, the Japanese Nikkei fell 211 points to 14,388, whilst the Hang Seng was down 384 points at 27,230 this morning.
Sterling slumps on rate cut expectations
Crude oil futures had crept up to $95.77 whilst Brent spot was at $94.44 in London.
Spot gold had retreated further from yesterday’s record high of $891.40 this morning and was last trading at $876.95. Silver had also fallen back to $15.59.
In the currency markets, sterling sank to a new record low against the euro this morning before edging back up to 1.3332, and also fell as low as 1.9542 before creeping back up to 1.9578. And the dollar was at 0.6808 against the euro and 109.78 against the Japanese yen.
And in London this morning, shares in J Sainsbury jumped by as much as 7.5% this morning after the supermarket chain announced expectation-beating third quarter sales. The retailer pinned the strong results on ‘a number of market-leading promotions in the run-up to Christmas’.
Finally, our recommended articles for today…
Why Brown’s wrong to blame America
– It’s easy to pin the credit crisis on the US as that’s where the first signs of trouble appeared. But the UK’s economic troubles are mostly of our own making, says Merryn Somerset Webb. To find out why Merryn Somerset Webb has reached her limit with Gordon Brown and his excuses, see: Why Brown’s wrong the blame America
Why inflation creates the perfect headache for Mervyn King
– Gordon Brown may be piling on the pressure for a rate cut by pointing to ‘low inflation expectations’, but the MPC should ignore him. Inflation is on the rampage – and it’s mainly down to China. As the Bank of England deliberates, Tim Bennett outlines the arguments against a rate cut here: Why inflation creates the perfect headache for Mervyn King