Shares digital

What will the retailers get for Christmas?

We look ahead to the crucial Christmas trading period

John Marshall

Two years ago the late Richard Ratner, a much-respected retail analyst, forecast Christmas 2006 would be the worst for many a long year. Ratner was only slightly premature in his timing. Christmas 2008 has all the hallmarks of a disastrous one for many retailers. Consumer confidence has been in steep decline for many months. The decline has been precipitous since April.

Confidence is now lower than at any time in recent memory as consumers battle against rising energy and food prices, which have reduced their real incomes. More importantly the economic commentators have added fuel to the misery by forecasting the recession will be long and deep. Rising unemployment and forecasts it will rise by perhaps another 50% will act as a further blow to consumer confidence. Meanwhile, the collapse of both the housing and stock markets have combined to make consumers feel even worse, especially as many experts expect the housing market to remain depressed for much of next year. Gloomy prospects for the economy, falling real incomes and the fear of unemployment will all combine to

provide a Scrooge-like backdrop

to Christmas.

The search for value

Already there have been two important trends. The first is the relentless search for value with Primark increasing sales while Marks & Spencer (MKS) haemorrhages them. Similarly within the grocery market the main beneficiaries have been the discounters such as Aldi and Netto and those supermarket groups such as Asda and Morrison (MRW) which have always emphasised their low price credentials. Tesco (TSCO) is now repositioning itself as ‘Britain’s biggest discounter’. Meanwhile M&S and Waitrose have lost market share despite a number of price promotions. This emphasis on value is likely to be the dominant theme this Christmas with Asda already advertising half-price offers on toys and Sainsbury (SBRY) doing so on confectionery.

As well as seeking better value from goods purchased consumers are also wanting to spend less overall. This has been especially true of certain sectors. The near-paralysis of the housing market has hit the DIY, furniture and floor covering markets. Sales of big-ticket items have been under real pressure with car sales plummeting, the furniture market almost disappearing and the electricals market also suffering.

Already several retailers have gone under. This is beginning to affect the attitude of credit insurers and suppliers. Both Woolworths (WLW) and DSG International (DSGI) are suffering from these difficulties. If credit insurers are unhappy then shareholders are unwise to continue to hold these shares. Nick Bubb of Pali International has cut his target price in DSG to 18p. Although he expects the group to ‘limp along’ he also fears that ‘things could quickly unravel after Christmas’. His 18p target could well be too optimistic.

At the time of the interims two weeks ago M&S described trading in October as ‘volatile’. Shares understands that so far trading in November has been much worse with apparel sales – partly influenced by the weather – well down on a year ago. The real conundrum is how will retailers react to clothing sales which could be well below those that they originally planned for. Some fear a major retailer will lose its nerve and bring in general price cuts. Freddie George of Seymour Pierce is more optimistic. He believes there will be more discount days. The reaction of shoppers has been very positive to discount days from House of Fraser and Debenhams (DEB). Extra discount days will have less of

an impact on margins than general price cuts.

Even if the clothing retailers hold their nerve over Christmas there could well be a blood bath in the New Year. This could only be bad news for M&S which is also suffering from a further erosion in its food market share.

Although the clothing retailers may hold their nerve, the supermarkets are likely to be more price conscious. Already they are all advertising food bargains. Analysts believe Tesco, which has been losing some market share, will seek to emphasise non-food offers as well. Attractive pricing of toys, for example, would help to burnish the group’s ‘value’ credentials. Any price war in toys will be bad news for both Woolworths, the range of which is being affected by the reluctance of some manufacturers to supply the group, and Argos. That would create a double whammy for Home Retail (HOME) which is also being hit by the impact on Homebase of the downturn in DIY spending.

Stocks for the stocking

When one analyst was asked which shares he would buy ahead of Christmas his reply was a succinct ‘none’. Others were less gloomy. Analysts such as Nick Bubb of Pali International and Rhys Williams of Arbuthnot believe Game Group (GMG) should be one of the few beneficiaries this year as it has been for the past two years. Nintendo Wii consoles are still difficult to obtain which means there is no risk of a price war. Games provide ‘relatively cheap family entertainment’ which should underwrite sales this year. The supply problems facing Woolworths will almost certainly mean its wholesale distributor of music, DVDs, games and books Entertainment UK, which supplies both Morrison and Sainsbury, will have a restricted range which in turn should reduce the scope for a price war.

Apart from strong sales growth Game Group is also enjoying synergies from the acquisition of Games Station. The benefits of this deal have so far exceeded expectations. Rhys Williams believes the combination of strong sales growth and these synergies should lead to further upgrades. The group is due to update the market on 2 December when it will issue an interim management statement. That could well lead to further profit upgrades.

WH Smith (SMWH) is another group which could be an Christmas winner. Many of its goods are relatively inexpensive. More importantly it has a record of ‘under promising and over delivering’. Nick Bubb believes Smiths ‘should at least hold its own in terms of book market share at Christmas’. The group is planning for ‘competitive trading’ over Christmas, which should mean that it is not blown off course. Bubb, who has a price target of 410p, is forecasting earnings of 41p placing the shares on a price/earnings ratio of 8.3.

Clinton Cards (CC.), which is still suffering from the ill-timed acquisition of Birthdays four years ago, is likely to fare less well. It will be hit by the reduced footfall in the High Street, the continued difficulties of the Birthdays chain and underpeformance by the key Clinton’s stores. Some of the most vulnerable retailers at present also include Land of Leather (LAN) which raised £13.5 million in June and five months later has a market value of just £2.6 million. Woolworths, and Jessops (JSP) also look like weaker players in the retail sector.

New year boost

For some retailers, such as the DIY, electricals, furniture and floor coverings groups, the real boost comes in the January sales rather than from Christmas itself.

This year any bonus will be extremely muted. The January discounts will have to reflect the retailers’ desperate need for cash and the consumer’s reluctance to spend. But ultimately furniture, DIY and floor covering companies will not recover until activity returns to the housing market.

The writer holds shares in Marks & Spencer, Wm Morrison, Tesco, Home Retail and WH Smith.