A return to non-food retail sales growth?
COVID-19 Market Update – 11/09/2020
9 minutes to read
Introduction
This is the 19th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note explores two key themes:
- What we learned from the BRC retail sales figures for August
- Takeaways from other retail reporting this week
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• Retail sales grow by +3.9% y-o-y in August
• Slight acceleration on July (+3.2%)
• Like-for-like growth stronger still (+4.7%)
• But still largely driven by grocery
• Grocery volumes impacted by F&B and ‘EOTHO’
• Non-food returns to positive growth for 1st time since Jan
• Strong demand in furniture, homewares and computers
• Improvement in fashion, but still in negative territory
• Online’s share of non-food declines to 39.3% as stores re-open
• Spend still below pre-pandemic levels
• Jigsaw’s CVA approved by creditors
• 13 stores to close, others move to turnover rents
• Outcome of New Look’s 2nd CVA due next week
• Landlords raise questions over lack of transparency
• Ann Summers mulling a potential CVA
• Turnover-rents very much in the spotlight
1. What we learned from the BRC’s retail sales figures for Aug
A further step on an unfeasibly long road to recovery – the positive trend in retail sales since lockdown was lifted continued in August and, if anything, is gathering pace as pent up demand is slowly being released.
According to the BRC, total retail sales grew year-on-year by +3.9% in August, a slight acceleration on the +3.2% reported in July. A benign comp notwithstanding (sales in August 2019 flatlined), this was the ‘best’ monthly performance since May 2018. Year-on-year like-for-like growth was stronger still (+4.7%). In another market, at another point in time, these figures might be seen as a triumph.
But performance between retail sub-sectors remains highly polarized and food remains the primary driver of growth. But even here, the BRC noted a slight drop off in volumes as the reopening of the hospitality sector and the ‘Eat Out To Help Out’ scheme partially redressed the imbalance we have seen through the pandemic.
More encouragingly, non-food finally returned to positive growth, driven by home-orientated categories such as furniture, homewares and computing. Clothing and footwear showed some improvement, no doubt through back-to-school activity, but are still in negative growth territory year-on-year and remain the retail industry’s main pinchpoint.
Despite the convergence of channels and the fact that large proportions of retail are in fact multi-channel, the BRC resolutely maintains a firm diving line between in-store and online and cheerleads more for the latter. Despite maintaining that “significant acceleration of the [online] channel is here to say”, the BRC figures show that online penetration is slowly easing as physical retail returns to something like full capacity. In August online accounted for 39.3% of all non-food sales, below both the three month (44.5%) and 12 month (41.2%) average.
But the BRC is more measured in its narrative than the ONS, categorically stating that “retail sales remain down overall since the start of the pandemic”, in sharp contradiction to the ONS’ previous assertion that “retail sales have rebounded to pre-pandemic levels”. Whilst the ONS may technically be right in that monthly retail sales are now higher than they were in February, the tone of the BRC is far more reflective of where the high street currently is.
The ‘official’ ONS retail sales figures for August are not released for another week (18 September). Whether their numbers concur with those of BRC is anyone’s guess (e.g. in July they broadly did [+3.7% vs +3.7%], in June they didn’t [+1.5% vs +3.4%]), but the general trends and direction of travel are likely to be similar.
My expectations for next week’s ONS figures: a slight deceleration in food sales growth (to maybe +2-3% compared to a monthly average of close to +7% over the last five months), a further reduction in online penetration (to maybe 26-27%, from a high of 33.4% in May) and, most significantly, a potential return to non-food growth (anything remotely positive would be good after five months of hefty decline).
A return to year-on-year non-food growth would be a watershed moment in the slow road to recovery, but it needs to be put into perspective. Non-food retail sales absolutely fell off a cliff during lockdown, with sales slumping by a monthly average of -34% between March and June (and -6.2% in July). Realistically, it will take many months of sustained positive growth (or ‘rebound’, in popular parlance) to compensate for this lost ground.
2. Takeaways from other retail reporting this week
Trading updates from four of the UK retail sector’s best and most resilient operators – Primark, JD Sports, Dunelm and Morrison’s – gave considerable context on the realities of trading through the pandemic and life in the retail sector since lockdown has been lifted. CVA activity (actual and potential) at New Look, Jigsaw and Ann Summers a sobering reminder of the ongoing battle many retailers face just to survive.
Despite generating zero turnover during lockdown itself, Primark is witnessing one of the fastest recoveries (again proving that a retailer does not necessarily need to be online to be successful). In a pre-closing update for the year ending 12 Sep, sales had been “reassuring and encouraging” since re-opening and cumulative sales for the year as a whole are expected to be ca. £2bn. Adjusted operating profit before exceptionals is now expected to be at least at the top end of the previously advised £300m – £350m range.
Primark gave telling insight as to the pace of recovery by location. Sales at stores on retail parks were higher than a year ago, while shopping centre and regional high street stores are broadly in line with last year. However, Primark’s 16 largest destination city centre stores have suffered “significant” decline in footfall and contributed to only 8% of total sales since lockdown, compared to 13% pre-COVID.
Primark’s FY sales in the UK are expected to be -12% lower on a like-for-like basis, but if the four large UK destination city centre stores (two on Oxford Street, Birmingham and Manchester) are excluded, the decline is expected to be just -5%. A reflection of footfall and trade in the West End and the major regional cities.
In its half year results, JD Sports reported a -6.5% decline in revenue in the 26 weeks to 1 Aug 2020 to £2.54 billion. The shortfall was, of course, the result of temporary closure of its stores during lockdown, but some of this lost trade did transfer online. But this negatively impacted the bottom line, with pre-tax profits slumping -68% to £41.5m. Additional costs of fulfilment are an all-too-often overlooked factor in wider celebration of online growth.
In terms of life post-lockdown, JD said it had been encouraged by the performance of stores since they reopened. Initial trading in stores after reopening was boosted by a “combination of pent-up demand and promotional activity”, but this was “generally short lived” as footfall remained weak, particularly in shopping centres. The business also flagged additional costs principally relating to the provision of enhanced health and safety measures – a timely reminder that “COVID-19 remains an ongoing challenge.”
Different sector, different retailer, but a broadly consistent story. Dunelm reported a -13.3% drop in pre-tax profit to £109.1m for the full year to 27 June. Sales fell -3.9 per cent year-on-year to £1 billion, despite a +6.8% pre-pandemic rise in sales in the eight months to February. As stores were closed during lockdown, online was able to pick up some of slack, with online sales doubling year-on-year.
Reinforcing the fact that homewares has been one of the strongest growth markets since lockdown was lifted, current trading figures at Dunelm are off the scale. During the first two months of its new financial year, sales were up +59% in July and +24% in August. But caution is never far away: “Whilst the year to date performance has been materially ahead of our initial expectations, it is very difficult to provide any meaningful guidance on the future outlook given the uncertainty in the wider economy and the potential impact of further regional or national lockdowns.”
Something of a reality check on the grocery side too from Morrisons. In the half year to 2 Aug, like-for-like sales (exc VAT and fuel) increased +8.7% year-on-year. But the business reported a decline of -28.2% in pre-tax profits to £145m as it incurred costs of around £155m to adapt to COVID-19 and a surge in online demand. Common themes across the grocery sector – strong demand, robust top line growth, but ongoing challenges and pressure on the bottom line.
The prospect of further occupier fall-out looms large, especially as September quarterly rent day fast approaches. This week, creditors approved the proposed CVA of Jigsaw, which will see the closure of 13 of the upscale fashion retailer’s 74 stores, including those in Westfield London, Bluewater, Manchester and Birmingham. The business is also pushing to move to turnover rents at 41 sites.
New Look’s second CVA is ongoing and is far more contentious. The company had reportedly canvassed interest in a sale of the business last month in conjunction with a CVA proposal, but no offers were made ahead of the deadline. This means New Look is now depending on creditors – which include landlords – to approve its CVA proposals when they meet to vote on 15 Sep. New Look has warned that if the CVA is not approved then directors would be forced to consider “less favourable alternatives”.
New Look’s CVA proposals entail switching more than 400 stores to a turnover-based rent model and a three-year rent holiday on its 68 remaining sites. But the British Property Federation has previously refuted New Look’s claims that its CVA proposal complies with BPF’s views on best practice. Many landlords have complained about the lack of transparency, again underlying one of the key stumbling blocks of the turnover-rent model – both sides have to play ball for it to be effective.
Ann Summers could be the latest retailer to launch a CVA. CEO Jacqueline Gold said the company might opt for a CVA as some landlords refused to work in partnership, despite the owning family injecting cash to keep the business afloat. Gold said some of the retailer’s landlords have taken a “pragmatic” approach, while others have not and continued to “bury their heads in the sand” and that the only way a retailer is able to resolve the situation is to undertake a CVA.
Retailers and landlords at loggerheads, one making threats, the other being inflexible. Both playing “hard ball”. Turnover rents being an equitable solution on paper, but unwillingness of both parties to cooperate and be fully transparent making it far harder in paractice. I think we’ve been here before. So much for COVID-19 prompting much vaunted “behavioural changes” – the “new norm” actually feels very much like the old.
Stephen Springham
Partner – Head of Retail Research
+44 20 7861 1236
stephen.springham@knightfrank.com