M&S and Debs – a triumph only in expectation management

Written By:

Stephen Springham, Knight Frank

10 Jan 2019

6 minutes to read

Categories: Retail UK

And so the charade of the Christmas reporting season enters full swing, with today the busiest day to date (hats off to the imaginative spark that has dubbed it Super Thursday). With my usual caveat of the dangers of reading too much into retailer Christmas statements and limitations of retailer comparisons, unless they are reporting on exactly the same trading period, here goes…

The Good

• Selfridges challenged the notion that department stores are a dying breed, recording 8% growth in a “record-breaking” performance. Less-celebrated Morleys saw like-for-likes climb 5.1% over the 3 week festive period. Strong performances also from a number of the more lifestyle-orientated fashion operators, such as Joules (+11.7%), Ted Baker (+12.2%) and Boux Avenue (+8.1% like-for-like). The other two Theo Pathitis-owned businesses Ryman and Robert Dyas were also in positive like-for-like territory (+3.9% and 1.1% respectively).
• Strong headline figures also from some of the out-of-town players, notably Dunelm, who reported 5.7% growth in sales (+9% like-for-like) in the 13 weeks to 29 Dec. Hobbycraft saw like-for-likes soar 7.1% in the 6 weeks to 24 Dec. Figures trumped by the garden centre operator (and ex-Tesco stablemate) Dobbies, which saw like-for-likes increase by 8% on the back of an exceptional 21% increase in sales.
• Although Asda may (or may not) have a late say, Tesco has emerged as the best-performing grocery retailer, with like-for-likes up 2.2% over Christmas (+2.6% including Booker). Against tough comps, Morrison’s clocked up like-for-like growth of 3.6%, although this figure was bolstered by wholesale activities and retail growth was a more modest (but still creditable) 0.6%. Of the more niche operators, Majestic Wine saw underlying sales rise 6.3%, while Greggs had such a storming end to the year that it has upgraded annual profit guidance.
• Award for the most selective Xmas trading statement so far goes to Aldi, which had its busiest week from 17 Dec, with overall year-on-year sales growth of 10% (but no figures for the rest of the month, nor any like-for-like steer). The fact that it had “record” Christmas is neither here nor there – it had 65 more stores trading in 2018 (space growth of +8.5%) so this was always going to be the case.

The Bad

• Marks & Spencer and Debenhams were always going to appear in this category. Bad, but maybe not as bad as many expected. But still not good. For more on both, read on to the end…
• Arguably, the most disappointing update came from B&M. Although group revenues increased by 12.1% in Q3, like-for-likes were down by 1.6% (despite a late rally in December). Not the worst figures by any means, but not as good as we have come to expect.  Topps Tiles’ 1.4% fall in like-for-like sales was more in line with expectation, while Card Factory saw like-for-like sales dip very marginally (by 0.1%).
• There have been two profit warnings to date, from Footasylum and, more surprisingly, Halfords. Footasylum has disappointed the City since its flotation and despite a 14% increase in total revenue to £102.m in the 18 weeks to 29 Dec, it warned that increased promotional and clearance activity meant that full year EBITDA would be at the lower end of forecasts. Halfords warned on profits following a 1.7% decline in like-for-like sales (-2.2% across its retail division).

The Indifferent

• Sainsbury’s figures were a mixed bag. Total group retail sales declined by 0.4% and like-for-likes were down by 1.1% in Q3. However, core grocery sales grew by 0.4%. General merchandise and clothing sales were down by 2.3% and 0.2% respectively. But on the plus side, part of this was due to a strategic decision to reduce promotional activity across Black Friday.
• John Lewis would seem an unlikely candidate to feature under the ‘Indifferent’ category, given its strong sales performance. In the seven weeks to 5 Jan 2019, sales at the department store arm grew by 2.5% (+1% like-for-like), while Waitrose was up 0.2% (+0.3% like-for-like). But the Partnership highlighted that gross margins came under pressure and effectively warned on profits – any coincidence that it also talked of “a longer Black Friday promotion”?

The Ugly

• Mothercare. Even allowing for its transformation plan, the figures were dire. Total UK sales declined by 18.4%, acceptable(ish) for a business that is downsizing. But UK like-for-likes also slumped by 11.4% and online sales declined by 16.3%. Further proof, albeit in reverse, of the symbiotic relationship between stores and online – taking a hatchet to the former and expecting the latter to flourish is a very dangerous strategy. 

Stephen Springham, Head of Retail Research:

If there were two retailers the media were looking to justify their ongoing mauling of the UK retail sector, they were always going to be Marks & Spencer and Debenhams. To a degree, the media got what they wanted, although both thankfully stopped short of issuing profit warnings in their respective Christmas trading updates. This hardly constitutes a triumph of trading, more a triumph of expectation management.

Very few of the figures in either release are pretty. In Q3 (13 weeks to 29 Dec) M&S’ total UK sales were down 2.7%, with like-for-likes down 2.2%. Clothing and Home was down 4.8% overall (-2.2% like-for-like) and Food, so long the pillar on which the group has leant, was down 1.2% overall (-2.1% like-for-like).

At Debenhams, Group Gross Transaction Value (GTV) in the 6 weeks to 5 Jan 2019 fell by 3.8%, while like-for-likes were down 3.4%. The shorter 6 week figures were markedly better than the longer 18 week ones, underlining the headline trends we are hearing from other fashion retailers – November was especially difficult, but there was a late surge in the period immediate before Christmas Day itself.

Two broadly similar sets of results belie polar opposite strategic stances at the two retailers themselves. M&S largely stuck to its guns on pricing – it avoided the folly of Black Friday, ran a select few promotions and did not discount in the run up to Christmas. Debenhams did the exact opposite on every count, to the point of exhaustion.

The feeling I got in my many visits to a significant number of Debenhams stores prior to Christmas was that it was chasing sales at any cost and that any residual brand equity that it still had was being sacrificed in a desperate and blinkered pursuit of cash in the till.

Basic retail disciplines had also fallen shockingly by the wayside in a number of stores that I personally visited – Guildford and Wimbledon the two most glaring examples.

Having chased sales so hard, Debenhams still saw revenue go backwards. There was no profit warning, but the margin implications must be huge. M&S can at least point to the fact that gross margins held steady.

But obviously, M&S’ top line needs to move at some point and there is still little indication of that happening anytime soon. To be fair, the M&S release is unusually scant in detail (e.g. no stripping out of short term Xmas figures from the wider Q3 ones), but this would seem a deliberate (and understandable) ploy. The tone is implicitly “this is year one of a five year turnaround plan, judge us in 2022”.

If there were any positives to be teased out from the two releases, they were predictably in the online growth figures (the City seems to like these, so why not?).

M&S’ Clothing and Home online sales grew by 14% and Debenhams’ digital sales were ahead by 6%. But downsizing the store estate and maintaining online performance is a very difficult conundrum to manage – just ask Mothercare.