It’s fair to say that surveys charting the health of the UK high street following June’s EU referendum have been erratic, at best.
Data from the Confederation of British Industry (CBI) last week showed retail transactions grew at their fastest pace in October for 13 months, its sales balance rising to +21 from September’s -8. And the body expects sales to rise by a similar amount this month.
However, the prospect of enduring sterling weakness and dipping consumer confidence amid Brexit-related readjustment is casting a pall over the long-term health of the sector. Indeed, CBI chief economist Rain Newton-Smith commented that “household spending still has some momentum in the short term, but we do expect the fall in the value of the pound to push up prices through the course of next year, hitting people’s purchasing power.”
These warnings come as chilling news to Marks and Spencer (LSE: MKS) in particular, the retail giant already having to contend with lukewarm demand for its fashion offer. The company advised in July that like-for-like sales of its clothing and interiors product lines slumped 8.9% during April-June. That’s a big fall, even in a tough fashion market.
Considering that sentiment towards the retail sector is already looking shaky, I reckon a similarly-disappointing update on November 10 could cause M&S’s share price to hurtle lower.
Supermarket strains
There’s no better news from parts of the British supermarket sector, which has already been the victim of suppliers trying to offset sterling troubles by jacking up prices.
Like Tesco, Bradford-based chain Morrisons (LSE: MRW) was drawn into negotiations with Persil and Marmite manufacturer Unilever last month. But while Dave Lewis’s grocery giant was able — at least reportedly — to avoid a huge cost hike, Morrisons fared less well and was consequently forced to hike shelf prices on Unilever’s goods by around 12.5%.
This adds an extra layer of profits pressure to Britain’s embattled supermarkets, whose margins are already being battered by the progress of low-cost operators Aldi and Lidl. Indeed, Morrisons initiated yet another round of price cuts, this time on some 160 products across the store, just last month amid the ongoing scramble to stop shoppers heading out the door.
The yellow-liveried retailer surprised the City in September by announcing a 2% improvement in like-for-like sales during February-July. But total turnover slipped 0.4% during the period, to £8.03bn.
And conditions are likely to remain tough as its competitors expand their operations in cyberspace and on the street, while the likelihood of yet more pound devaluation takes a further bite out of the bottom line.
Signs of toughening industry conditions in this month’s quarterlies (marked in for November 3) could prove the catalyst for a negative share-price rerating, in my opinion, particularly as recent strength leaves Morrisons dealing on a conventionally-heady forward P/E ratio of 21.1 times.
