The retail note - 20 April 2017
Stephen Springham, Head of Retail Research, breaks down the latest sector headlines.
4 minutes to read
- The turnaround at Tesco is gaining momentum. Group sales rose 4.3% to £49.9bn in the 2016/17 FY. Operating profits before exceptionals increased 29.9% to £1.3bn and UK like-for-likes grew by 0.9%, the first year of positive growth since 2009/10, driven by a refocus on the basics of the business, being price competitive against the discounters, investing in the stores and the product offer. Strong figures were partially overshadowed by ongoing whys and wherefores over the proposed merger with Booker.
- Solid figures from Primark. The business achieved a 3.2% lift in operating profit (at actual exchange rates) to £323m for the 24 weeks to 4 March. Sales grew 11% year-on-year over the same period to £3.2bn. In the UK, Primark’s sales grew 7% overall and 2% on a like-for-like basis. Five new UK stores were opened - Carlisle, Colchester, Stafford, Truro and York.
- Bonmarché claims to be turning the corner. The value womenswear retailer saw like-for-like store sales fall 4.3% during the 53 weeks to 1 April, but in the final quarter, the decline slowed to just 0.5%. Total sales rose 2.7% in Q4. Having issued a profit warning back in September, the business provided assurances that full-year pre-tax profit before exceptional items would be “slightly above” £6m.
Stephen Springham, Head of Retail Research:
The spotlight falls on the UK department store sector this week, with House of Fraser and Debenhams reporting full year and half year results respectively. ‘Beleaguered’ is a prefix widely applied to the department store sector, although there is very limited evidence to justify this tagline. Be that as it may, barely a week goes by without the covenant strength of one of the department store operators being called into question.
Why the negative perception? The spectre of BHS and Woolworths may cast a shadow in the minds of some, although the link is a tenuous one. Both of these were technically variety store operators rather than department stores. Even glossing over retailing semantics, they were very different businesses with issues peculiar to, rather than typical of, the wider retailing market. Few parallels should be drawn between BHS and Woolworths and their department store counterparts.
For others, the very concept of department store retailing may seem an anachronism – why operate large scale, high maintenance, cost intensive stores when surely the future is online? Those of an international persuasion may point to the example of the US, where the likes of Macy’s and Sears are drastically downsizing their store portfolios. Or Germany, where four major operators became two, one of which (Karstadt) has seemingly been on the brink for years, the other (Kaufhof) was marketed for years by parent Metro, before finally being bought by Hudson’s Bay of Canada. But the UK is not the same as the US or Germany – believe it or not, department store sales are still growing in the UK and as a channel of distribution, department stores’ share of retail spending is growing (albeit modestly) rather than declining.
For me, some of this negative perception is little more than Chinese whispers within the property market. The strength of a department store’s covenant is called into question by one party and the rumours start doing the rounds as to that retailer’s longevity. Rumour is ultimately misconstrued as fact. There is certainly no evidence of distress in any of the major protagonists’ trading performance. For the year to 28 January, HoF reported a like-for-like sales increase of 0.9%, while pre-tax profit rose from £1.3m to £3.4m. Gross margins were stable at 36.9%. Debenhams saw UK like-for-like sales increase 0.5% for the 26 weeks to March 24, but with a 6.4% drop in pre-tax profits to £87.8m. Not spectacular, but by no means a disaster.
Both HoF and Debenhams are undertaking strategic reviews. In very general terms, the underlying thrust is fourfold. 1. To re-appraise the brands they stock and weed out under-performing ones. 2. To ensure that their online operations dovetail seamlessly with their store-based ones. 3. To maximise the productivity of floorspace. 4. To move the focus away from purely retail towards more of a lifestyle experience.
Space requirements will inevitably be reviewed as part of these processes. But this is unlikely to result in waves of store closures, as some are predicting. Nor is this a knee-jerk, last ditch response to what is undeniably a very demanding retailing environment. It is a measured, strategic attempt to future-proof their business models and make them fit for the longer term. Maybe some of their genuinely beleaguered international peers should be taking note.