DANNI HEWSON Picking through a really difficult year for the retail sector

DANNI HEWSON

AJ Bell Financial Analyst

Picking through a really difficult year for the retail sector

The winners, the losers and what's required to thrive for the long term

The latest retail sales figures in both UK and US were the mouldy icing on top of a rapidly crumbling cake. Despite Black Friday promotions that seemed to start right at the beginning of November, UK retail dropped off significantly and the US experienced the biggest fall in sales in 11 months.

People are having to make tough choices about what exactly it is they want from the festive season. What can they do without and what are the traditions and expectations that can’t be ditched if Christmas is to feel like Christmas and not a poor substitute?

FOOD A FESTIVE PRIORITY

In the UK people seem to have been prioritising food spend, popping a few extras into their trolleys as they carried out the weekly shop throughout November. All those little tasty treats add up when food inflation is rising at the fastest rate in 45 years. And with budgets so tight if people are spending a bit more on food and drink, they’ve got to cut back elsewhere.

Retailers are having to fight hard for every discretionary pound and investors have been heading for the hills. On the day the ONS released its retail update only one of the FTSE 350 retail stocks wasn’t in decline – that was online fast fashion play ASOS (ASC). If you look back to the start of the year it’s a sea of red with all FTSE 350 retail stocks down and ASOS is the biggest faller, down a whopping 79%.

From the first trading update of 2022 retailers were warning of a ‘tougher environment’ with bellwether Next (NXT) cautioning about increases in costs of goods, UK operating costs and wage inflation.

Despite early optimism from some traders that a reopening economy would rejuvenate the sector, the insidious creep of inflation has defeated several household names both from the high street and online.

Online sofa seller Made.com, womenswear veteran Joules and Saville Row tailor Gieves and Hawkes were among the retailers calling in administrators as margins became wafer thin and consumer behaviour was turned on its head.

Trendspotters were at a loss as what used to sell, stopped selling in the same way. Warehouses that had struggled to bring in goods during supply snarl ups became packed liabilities.

Some retailers, like Zara owner Inditex (ITX:BIT), figured out a way to sell goods at higher prices, ramping up stocks of must-have occasion wear with a social media cachet. That approach pulled in some customers normally more at home in luxury stores.

Next share price over the last five Inditex share price over the last years five years

(p) (€)

8,000 8,000 30

6,000 6,000 25 4,000 4,000 20

2018 2018 2018 20192019 2019 20202020 2020 20212021 2021 20222022 2022 2023 2023

Chart: Chart: Shares magazine Shares magazine • • Source Source: : Refinitiv Refinitiv

DANNI HEWSON

AJ Bell Financial Analyst

Inditex share price over the last five years

2018 2019 2020 2021 2022

Chart: Shares magazine • Source: Refinitiv

NEXT AND FRASERS ADD TO THEIR EMPIRES

Next and Frasers (FRAS) muscled their way through the last year by adding girth to their already sizable empires. Frasers’ stock had been in the green until recently, but the market is nervous about rising inventory levels and the fact much of the increase in sales for the business has come because of store openings and acquisitions.

There are also questions about Frasers’ future as controversial figure Mike Ashley has taken a step back from the day to day running of the business. So far Michael Murray’s ‘elevation’ strategy seems to be a good bet with higher-end stores being cushioned from the worst of the cost-of-living crisis by the nature of their customers.

Longer-term, with few challengers left in the department store environment, and a roster of brands that could fill a monopoly board, it’s worth watching the integration of old and new.

That’s something Next is a master at and its hybrid operation coupled with a knack of keeping expectations at a manageable level, gives the business a decent measure of resilience.

Despite solid trading updates this Christmas isn’t expected to be a stellar one and with inflation expected to hang around like a bad smell well into 2023 investors are rightly concerned about how much further retailers can put up prices. Primark-owner Associated British Foods (ABF) even promised customers there would be no more hikes this year from its retail chain.

SPOTTING TRENDS CAN REAP YOU REWARDS

Despite retail’s ‘annus horribilis’ it hasn’t been all bad news for investors in retail stocks if they are taking the long view. Some retailers will have made you money over the last five years. If you’d invested £5,000 in Frasers or Next then you’d be sitting on £9,945 and £7,635 respectively today (indicative return not encompassing fees and charges).

It’s all about spotting trends, figuring out how consumer habits are going to change and working out which companies are best positioned to respond to those changes. Whilst the last five years has been predominantly about online possibilities the last 12 months has shown that the virtual high street has grown too big, too fast.

There will be further failures but there will also be opportunities once inflationary pressures begin to ease. The key will be knowing the customer and giving them exactly what they want for as much as they’re willing to pay.

Notable new additions to Next and Frasers’ retail portfolios as rivals collapse

Company Collapsed Acquired by

Studio Retail Feb ’22 Frasers Missguided Jun ’22 Frasers Made.com* Nov ’22 Next Gieves & Hawkes Nov ’22 Frasers Joules* Dec ’22 Next Amara.com Dec ’22 Frasers

Table: Shares magazine • Source: Company accounts. *Some assets