The retail note - 30 June 2017
Stephen Springham, Head of Retail Research, breaks down the latest sector headlines.
3 minutes to read
- A string of retailer results this week smack more of ongoing resilience, rather than distress. JD Sports is the latest retailer to confirm that despite “anticipated margin pressure”, it will deliver growth in line with market expectations when it formally reports its full-year figures in September. The business opened 28 stores in the period to 24 June 2017, including its first two stores in Australia.
- After DFS’ mild profit warning the previous week, Carpetright provided some comfort for the discretionary, big ticket market. Although the full-year figures appeared weak (total UK sales down -2.6%, like-for-likes -0.5%), this masked a significant turnaround in the second half of the year. Having completed the store rationalisation programme in the first half, like-for-likes grew by 1.8% in H2, with refreshed stores delivering an average 5% uplift.
- Nor were Debenhams’ figures as bad as some anticipated. In the 41 weeks ended 17 June 2017, group gross transaction values were up 1.7% and group like-for-likes were up 1.8% (albeit with some deterioration over the past 15 weeks). More encouraging was the fact that full-price sales grew by 1.7% over the period as the business reduces its reliance on heavy discounting to drive sales.
Stephen Springham, Head of Retail Research:
Of all retailer performance figures in recent weeks, those of Dixons Carphone stand out. Not only do they attest to the strength of the business generally, they also debunk many of the lazy assumptions that are perennially made of the retail market and have abounded with renewed vigour in the wake of Brexit.
For the year ended 29 April 2017, total group revenues grew by a highly impressive 8.6% to £10.6 billion, on like-for-like sales ahead 4%. Group pre-tax profits grew by 10% to a record £501m. In the UK and Ireland, revenue grew by a slightly more modest 2% to £6.6 billion, on like-for-likes up 4% (or 3% if sales transferred from store closures are factored in). Even the most demanding analyst would struggle to find fault in any of the figures.
Of all retail sub-sectors, electricals is one of the toughest at the best of times. High ticket prices belie notoriously low gross margins for retailers. In laymans terms, retailers don’t make much money on each item they sell, so they have to sell a lot of product to generate anything like a decent return. Electricals is also one of the most deflationary retail product categories – the latest, upgraded model is never far away, rendering previous incarnations obsolete in a very short space of time.
Electrical retailing also lends itself extremely well to online retailing, given that most products are commodity-based (i.e. branded) and require home delivery anyway. And not surprisingly, this is a market that Amazon is all over – and the common consensus seems to be that it’s impossible for any other retailer to successfully compete with Amazon. At anything. Ever.
Electrical retailing is hard enough at the best of times. And these aren’t even the best of times. The post-Brexit UK consumer is apparently being squeezed into submission, as retail price inflation soars ahead of wage growth. Facing a decrease in disposable income, the UK consumer is inevitably having to cut back, and discretionary, big ticket purchases such as electricals are invariably the first thing to give.
What hope therefore for a store-based retailer in an online sector bossed by Amazon, where margins are wafer-thin and consumer demand is evaporating? Dixons Carphone’s figures highlight the limitations of any of these common retail assumptions.
What do Dixons Carphone’s performance figures actually tell us? They again underline the value of multi-channel retailing, if executed properly (Dixons Carphone has an integrated online and store-based proposition). And that consumers are continuing to spend on big ticket items, despite any ongoing uncertainty around Brexit. Also, that it is possible to compete with Amazon. And, above all, some retailers are better than others at understanding their customers’ and aligning their strategy accordingly.