May retail sales – not the worst month on record

Written By:

Stephen Springham, Knight Frank

21 Jun 2019

4 minutes to read

Categories:

• Hold-the-front-page headline numbers from Dixons Carphone need considerable qualification. The widely reported pre-tax loss of £259m for the year to 27 April was statutory – on an underlying basis, pre-tax profits stood at £298m (a decline of 22% nonetheless). Group like-for-like revenue was up 1% in the year, as electricals like-for-like sales in the UK and Ireland edged up 1%. However, mobile like-for-like sales in the UK and Ireland dropped by 4%. This is the side of the business that is feeling the most pain, with consumers increasingly switching away from 24-month contracts (which come with a free phone) to more flexible contracts and to buying phones outright. On speculation of sweeping store closures, CEO Alex Baldock stated: “We like shops. Over time we will have fewer than we have today, but we have no immediate plans to close many more”.
• Comfort that it is possible for a retailer to come back from the brink of collapse. Bed retailer Dreams has reported its fifth year of sales and profit growth since emerging from a pre-pack administration in 2013. For the year to December, the business posted an increase in pre-tax profits of 11.7% to £32.7m, on sales up 2.9% to £309m. The group opened an additional 17 new stores over the year, bringing its overall portfolio to 198 sites.
• A rare thing in retail at the moment – a profits upgrade. Homewares retailer Dunelm expects to post full year profits ahead of previous expectations on the back of strong trading since its last trading update on 10 April ,when it reported like-for-like sales had increased by 12.5%. Dunelm said it has seen “very good” like-for-like sales growth, particularly in May and June and that it has benefited from unseasonably favourable weather conditions this year. Good conditions for homewares operators, less good for other retail sectors…

Stephen Springham, Head of Retail Research:

With the half year rapidly approaching, a quick temperature check of the UK consumer through the latest retail sales figures from the ONS.

It its earlier release, The British Retail Consortium had somewhat melodramatically declared that May was the worst month on record (-2.7% overall, -3.0% like-for-like). With the ONS release, the media inevitably made the schoolboy error of focussing on the month-on-month trend (as opposed to the year-on-year-one) and trotted out the same lazy narrative of lower footfall, weaker consumer confidence, Brexit etc.

Not only did they report the wrong numbers, they also failed to pick up the underlying causes of what is undoubtedly a slowdown. Year-on-year retail sales values were up +2.2% in May, considerably lower than the unsustainable highs of +4.5% in April and +6.5% in March. But a three month collective growth rate of +4.5% is hardly cataclysmic. For those of a dramatic persuasion, May’s figure wasn’t the weakest monthly performance ever (that accolade goes to the -1.7% decline recorded in May 2009), but it was the lowest rate of growth since June 2016 (+1.3%).

The main reason for the slowdown? Basic mathematics. Sales in the corresponding month last year were up by 6.3% and this was always going to prove a challenging comp. And, of course, the key driver behind last year’s strong performance was the heatwave, which provided a significant boost to most (but not all) retail sectors. And this will be a recurrent theme in the coming months too, with sales in June, July and August last year up by +4.4%, +5.5% and +4.7% respectively. A tough comp base that will subdue headline performance, unless there is a major change in the weather (and here’s hoping).

Individual retail sub-sectors move in mysterious ways in response to weather patterns. Some like it hot, others clearly don’t. The trading update from Dunelm suggests that furniture and homewares fall into the latter camp and this is reflected in the ONS figures, with year-on-year furniture sales up 2.8% in May. In contrast, fashion retailers find it difficult to respond when the weather is ‘unseasonal’ and sales of clothing went backwards by -0.9% last month (although this came off the back of two strong months in March and April). Much more severe was the decline in DIY spend of -13%, the second successive month of double-digit negative growth.

It is ironic that those most hell bent on undermining the UK retail sector failed to pick up on one of the genuinely more worrying trends in the ONS release. Value and volume growth was exactly the same (+2.2%). By extension, the retail sector is currently seeing zero price inflation. Some sectors, notably clothing and footwear are actually deflationary. Promotional activity and discounting are still rife and this ultimately this will do little to alleviate pressure where it is at its most intense – the bottom line.

There is no denying the challenges that the UK retail market faces and a good or bad month here and there isn’t going to affect much deeper structural change that will take many years to play out. Despite expectations (and lazy media conclusions) to the contrary, the UK consumer is continuing to spend. But a delayed heatwave as per last year wouldn’t go amiss either, even if our friends in the homewares and furniture sector wouldn’t necessarily agree…