The retail note - 7 June 2017
Stephen Springham, Head of Retail Research, breaks down the latest sector headlines.
4 minutes to read
- Unsung Iceland continues to outperform a generally improving grocery market (see below). The frozen food specialist reported a 4.4% rise in sales to £2.8bn in the year to March 2017. Like-for-like sales increased 2% during the period and full-year profits grew 6.3% to £160m, thanks to strategic investment in stores and product ranges. During the year, the business opened 24 Food Warehouse cash & carry outlets and four traditional Iceland stores.
- Weak figures from New Look. For the 52 weeks ended 25 March, revenues declined by 2.4% to £1.45bn on like-for-like sales down 6.8%. Adjusted EBITDA fell 31.8% to £155m on the back of weak sales performance and strategic investments, designed to reduce the levels of discounting and focus on responding more rapidly to the latest fashion trends.
- Better results from some of the smaller fashion players. Joules reported a 19.6% increase in revenue to £157m in the 12 months ended 28 May and predicted that pre-tax profit will be "comfortably ahead" of earlier guidance. The fashion retailer opened 11 stores during the year. Meanwhile, footwear specialist Shuh recorded annual sales growth of 5.3% to £280.9m in the year to 31 January, with pre-tax profits up 9.3% to £16.6m. During the period, the retailer opened two new standalone children’s stores at Stratford City and Bluewater.
Stephen Springham, Head of Retail Research:
What to make of the latest BRC retail sales figures for May? Other than they seem to have received more press coverage than the April ones, just because they were bad. The most obvious observation is that the yo-yo trend of the year to date continued spectacularly in May. January was weak after a strong December. There was a bounce back in February, but the figures for March were deflated by the timing of Easter. Conversely, April’s figures were boosted substantially by the inclusion of Easter. May saw a largely inevitable comedown from the highs of the previous month.
The figures for last month were weak rather than universally grim. Total retail sales actually increased by 0.2% year-on-year, although like-for-likes were down 0.4%, against fairly strong comparables in both cases. One very clear trend is emerging – and one that we are very familiar with from previous times of uncertainty and austerity. The equilibrium of retail spending is shifting back towards the non-discretionary end of the market. In simple terms, rather than rein in spending altogether, consumers are spending more on grocery than they are on non-food items. Accordingly, over the last three months, food sales have increased 4.3%, significantly ahead of very pedestrian growth of just 0.1% in non-foods.
To underline this polarisation, the like-for-like performance of non-food (-0.3%) was the lowest since May 2011, according to the BRC. In contrast, that of food (+3.2%) was the strongest three month average since February 2012.
But just how robust and sustainable is the recent performance of the grocery market? In many quarters, the growth we are seeing is rather glibly being attributed to inflation. Rising input costs on the back of the depreciation of Sterling are definitely feeding through more obviously in supermarkets than other retail channels. But food price inflation (ca. 2%) is still someway short of underlying market growth (3%+), indicating that there is still relatively healthy volume growth.
Contrast these dynamics with where the market was in 2015 – back then, the grocery market was hamstrung between negative/negligible volume growth and hefty price deflation. The pain amongst the major supermarkets was acute and widely documented. The industry subsequently entered a period of drastic structural change.
Fast-forward to the present, the grocery market is in far better shape. Volumes are up (i.e. consumers are buying more) and the deflationary spiral has been broken, admittedly through unwanted external cost pressures rather than retailers’ merely putting up prices. Make no mistake, the structural change within the industry is ongoing, but the environment is slightly more forgiving now than when the market was at its nadir a couple of years ago.
As for the wider retail market picture, May’s figures again underline the danger of reading too much into a single month’s performance. If the pattern of the year-to-date is to continue, June’s figures would need to show a recovery. Trite as it always sounds, the weather is likely to have a strong bearing on this, one way or another.
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