The retail note - 2 November 2017
Stephen Springham, Head of Retail Research, breaks down the latest sector headlines.
4 minutes to read
- US hedge funds may have little faith in the UK grocery market, judging by the amount of ‘shorting’ that is apparently taking place (don’t judge the UK by US standards I say, plus you’re three years too late anyway) but at least three of the Big Four have got their houses in order (and the one that hasn’t yet is, ironically, US-owned). Asda this week announced that its current CEO, Sean Clarke, will be replaced by its current chief operating officer, Roger Burnley. An anticipated succession, but not one expected this soon.
- Morrisons (who, co-incidently, was being completely written off three years ago as being the most vulnerable of the Big Four) continues to go from strength to strength. Like-for-like sales grew 2.5% in the 13 weeks to 29 October, as like-for-like transactions climbed 2.1%. Measured investment in price through its rolling ‘Price Crunch’ initiative and new ‘Way Down’ campaign, plus a deep understanding of its customer base delivered an eighth consecutive quarter of like-for-like growth.
- An interesting set of results from Fat Face. Total revenue rose by 1.9% to £226.1m in the 53 weeks to 3 June 2017, against strong comparatives. EBITDA dipped from £33.5m to £29.7m, although on a constant currency basis it was up 0.9%. During the year the business made its biggest ever investment, ploughing £9.5m into a new distribution centre. Surprisingly, e-commerce sales declined by 3% as it pulled back from heavy online discounting. Encouragingly, Fat Face also opts out of Black Friday.
Stephen Springham, Head of Retail Research:
Some frankly pathetic overreaction to Next’s results this week left me wondering if many in the City actually understand the realities of multi-channel retailing. Or even retailing at all, for that matter.
The figures themselves were by no means terrible. Q3 full-price sales advanced 1.3% in the 12 weeks to 29 October. In the year to date, full-price sales are down 0.3%, in line with its central guidance for the year. Including markdown, total sales edged up 0.8% during the period, but were down 1.2% for the year to date. In very simple terms, underlying performance is slowly improving (Q3 was the best quarter of the year so far), but Next is growing slower than the wider fashion market and is therefore still losing market share.
But it seems that it is CEO Lord Wolfson’s comments that have really spooked the City. He is, quite rightly, regarded as one of the country’s leading retail lights, but is renowned for saying it as it is, rather than prone to bouts of optimism. His statement that trading has proved “extremely volatile” and will remain so over the Christmas trading period prompted share price writedowns across the retail sector. That a fashion retailer should be so impacted by the vagaries of the weather should really not be news to those who should know better. The lazy (and erroneous) notion that online is merely supplanting the high street also glosses over one of the main structural changes that the digital revolution has prompted – the complete disruption of traditional sales patterns. Of course retail markets are going to be volatile.
On the subject of online, too much scrutiny has also been placed on the apparent disparity between the e-commerce (Next Directory, sales up 13.2%) and bricks & mortar (Next Retail, sales down 7.7%) sides of the business. The reality is that these are actually two mutually-supporting businesses which couldn’t survive without the other, so to split figures out is meaningless. But cue calls to take a hatchet to the store estate, rather than continue to grow floorspace at the current run rate of ca. 3% per annum. And calls to invest more in its online platform – which is as naïve as it is ironic, in that stores are a key component of its online platform.
And other misguided calls for the business to trade from ‘fewer, smaller’ stores. Its residual (<5,000 sq ft) stores are actually the least effective part of the Next business and are the ones slowly being replaced. These stores are ‘old guard’, where Next was 20 years ago. Very difficult to convey any product authority in such a small environment and make any showcase for the brand. So ironic that another lazy retail buzzword is “showrooming” and there is a constant clamour for physical stores to offer “an experience”. Much, much easier to accomplish this across a larger floorplate than a smaller one.
I could go on. But to draw a final parallel with how Next’s multi-channel strategy is being misunderstood, it’s a bit like analysing the performance of a football team and concluding that as it’s strikers and midfield that score the majority of the goals, you may as well dispense with the goalkeeper and the defence. A six-man football team with no defence isn’t going to win any games.