Nov 20, 2008
DSG and M&S likely Christmas turkeys
Nov 20, 2008
Profits have already been unravelling, with the pair losing out to rivals as the economic downturn deepens. And it is likely to be too late now to influence that trend to any great extent in time for the crucial Christmas trading period.
At the end of a woeful year for the sector, which has seen the FTSE All Share General Retailers Index fall 55 percent, shops have already succumbed to early discounting.
M&S, Britain's largest clothing retailer, held a "20 percent off" sale on Thursday, its first pre-Christmas clearance for four years. This was seen as a response to Debenhams' three-day "Christmas Shopping Spectacular," offering 50 percent reductions on some lines, which kicked-off on Wednesday.
"The retail sector usually faces a testing and nervous time trying to gauge the temperature of consumer demand in the run-up to Christmas. But it faces exceptional uncertainty this year," said Jeremy Rance, director retail and wholesale at Barclays Commercial Bank.
Official data on Thursday showed the volume of British retail sales in the three months to October was 2.2 percent higher than the same period a year ago -- the slowest growth in retail sales since April 2006.
DSG, Europe's second-largest electricals retailer and the owner of Currys and PC World in Britain, has had a dreadful year as consumers have reduced spend on big ticket items amid increased utility bills, rising unemployment, plunging house prices and tighter credit conditions.
Earlier this month M&S reported its worst performance since 2004. Executive chairman Stuart Rose predicted trading conditions will remain difficult until the end of 2009 but said he was taking a "glass half-full" attitude to the festive season.
Few winners are anticipated on the high street this Christmas as Britain enters its first recession for at least 15 years but those expected to buck the gloomy trend are retailers with large exposure to the still buoyant computer gaming industry.
Game Group and HMV Group are seeing phenomenal demand for Wii and Xbox 360 games consoles, which in turn is driving software sales.
Pure online players, such as fashion retailer ASOS, are expected to outperform, benefiting from the migration of spending from the high street to the Internet and a young core customer base.
The grocery sector looks set to be characterised by cash-strapped consumers trading down from the most upmarket chains -- M&S and John Lewis' Waitrose.
The big four British supermarkets -- Tesco, Asda (owned by Wal-Mart Stores), J Sainsbury and WM Morrison Supermarkets along with the discounters Aldi and Lidl are forecast to benefit from shoppers cutting back on dining out but spending more to entertain at home.
"Aside from the boom in gaming, the rest of the electricals market will struggle with a lack of compelling new technology launches limiting opportunities for electricals retailers," said Nick Gladding, analyst at Verdict Research.
Dixons' problems have been exacerbated by its admission that it has stocked the wrong range of products, at uncompetitive prices, in poorly laid-out stores.
Shares in DSG have lost 90 percent of their value over the last year. It hit a new low of 9.7 pence on Wednesday, valuing the business at just 195 million pounds, less than 10 days' sales.
The stock trades at 3.67 times forecast earnings, versus a sector average of 6.75 times, according to Reuters data.
Last month the group said sales at stores open at least a year fell 7 percent in the 24 weeks to October 18, while gross profit margins were down 70 basis points.
Nick Bubb, retail analyst at Pali International, said his year to end-April 2009 pretax profit forecast of 80 million pounds -- down 62 percent from 213 million pounds in the previous year -- is predicated on second-half like-for-like sales being no more than 5 percent down in the UK.
But he fears it could easily be worse than that given John Lewis' electrical sales were down about 14 percent like-for-like in the week to November 8.
"Much depends on how much confidence the suppliers have in the business and things could quickly unravel after Christmas," he said.
JP Morgan analysts are equally gloomy. "We expect the results to look very poor and give little support for those concerned about the group's prospects to survive the downturn intact," they said in a preview note.
Shares in M&S, whose 600-plus British stores are visited by more than 21 million people every week, have plunged by 67 percent over the last year, hitting a 7-1/2 year low of 192 pence in September. The stock trades at 6.67 times forecast earnings.
Earlier this month the group reported pretax profit down more than a third to 298 million pounds for the six months to September 27, with UK like-for-like sales down 5.7 percent, UK gross margin down 1.35 percentage points and market share falling.
M&S' food business looks particularly vulnerable, with the group having admitted to poor stock availability and insufficient promotions.
"The Christmas trading period is crucial for M&S and we expect like-for-likes to deteriorate from current levels," said analysts at Goldman Sachs in a note to clients.
"We continue to believe that trading conditions will be challenging through full-year 2010, especially in the food business where M&S continues to lose market share."
The January sales period is key for the struggling DIY sector. But with economic conditions deteriorating B&Q owner Kingfisher and Home Retail Group's Homebase can expect little relief.
As consumers digest their Christmas spending the DIY retailers will have a hard time persuading shoppers to splash out on new kitchens and bathrooms.
Indeed, 2009 is forecast to be an even worse year than 2008.
"Casualties are likely and these may begin with suppliers to retailers," said Richard Hyman, strategic adviser to the retail practice at Deloitte, the business advisory firm.
(Editing by Chris Wickham)
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