A spot of blood never hurt anyone, did it? So why is everyone afraid of all the red stuff spilled on the high street recently? Surely, for savvy investors, there must be some fantastic bargains to be found amid the retail sector carnage. Surely?
Well, not necessarily. The mood on the high street is going to get worse before it gets better.
The list of casualties goes on and on
Recent news from the high street has been extremely downbeat. This can be seen at two levels.
At a general level, retail sales volumes stagnated in August, while the decline in sales in July was revised lower to show a drop of 0.6%, instead of the previously reported 0.3% decline. The 12-month increase in sales to August was a paltry 0.8%, which matched May for the lowest reading in over nine years.
And things aren’t any better at a more specific level. For instance, Next, the fashion chain, reported underlying sales down 9% in the six weeks to 10 September, the worst trading figures in seven years. “It was the worst consumer environment for 15 years,” said Simon Wolfson, Next’s chief executive.
Meanwhile, underlying sales at the B&Q DIY chain were down 6.4% in the six months to July. As a result, Kingfisher, the parent company, has announced the closure of 22 B&Q stores. Wickes, another DIY outlet, said that sales in July and August were down 7.4%, while MFI issued a profits warning after reporting a 15% slide in sales in July and August.
Other retailers have also released lacklustre trading figures. Dixons reported another poor quarter at The Link, its mobile phone chain, with underlying sales down 28% in the 16 weeks to 20 August. The outlook, moreover, remains gloomy. Fashion retailer French Connection said that wholesale orders for autumn and next summer were down 15% compared to this time last year.
Matters have got so desperate on the high street that bitter rivals Philip Green of BHS and Stuart Rose of M&S buried the hatchet in a publicity stunt to entice shoppers back to Oxford Street, where terrorist threats and congestion charges have been an additional burden. Indeed, Central London has had a dismal summer with the number of shoppers down between 10% and 22%.
To be fair, if you are a regular reader of The Fleet Street Letter these developments are hardly surprising. Consumer spending was bound to retrench in the face of a stagnant housing market, higher council tax and utility bills and the rising price of petrol. We have been consistently bearish of general retailers.
Over the last 12 months, the gloom on the high street has been reflected in share prices. Since September 2004, the FTSE General Retailers index has underperformed the FTSE All-share index by 20%.
So is all the bad news factored in the share price of retailers? After all, some are starting to look cheap. The sector, indeed, trades on a modest 13 times future earnings with a respectable dividend yield of 3.5%.
My view, however, is that conditions in general retailing are likely to get worse before they get better. The CBI recently released its weakest retail survey for 22 years. Furthermore, distressed debt expert Hilco reckons that ‘five or six decent-sized’ store groups face serious problems. Furniture retailers selling big ticket items dependent on a reviving UK housing market are, in particular, likely to remain under pressure.
Retailers crave a rate cut – but the Old Lady’s not for turning
And do not expect the Bank of England to come to the rescue, like a knight in shining armour, with the rate cuts that retailers so desperately crave. Back in early August everyone expected the Bank of England to cut rates. The Old Lady duly obliged. But the mood was that this move would be the precursor to a swift succession of interest rate cuts. This optimism has evaporated.
Indeed, the agreed cut in rates in August was a much closer decision than many expected. It was carried by the narrowest of margins, 5 to 4, with, significantly, the Governor, Mervyn King, in the minority, voting for rates to stay on hold. All four of the Bank of England ‘insiders’, in fact, voted against a rate cut.
So it is significant that, at the following meeting in September, no member had the temerity to vote for further rate cuts.
So the message is straightforward. Although the retail sector is beginning to look cheap, there is worse news to come and we would not take the plunge with a mass market retailer just yet.
By Brian Durrant for The Fleet Street Letter