Retail outlook in the UK has been looked upon as a mixed one with a sinusoidal wave of sales data released or expected to be released in the upcoming days. Lately, Radical food retailer Asda has updated the market on festive season trading, meanwhile many big names, in general, have also issued statements. Many other big names that have been set to report their festive trading included Primark, WH Smith and Dixons Carphone; thus January is expected to set the wave for the year ahead. Clothes and fashion retailer, Asos had already talked about the challenges to profit reporting in December itself. It is just a few days into the new year, and UK retailers are yet to report results to match the pre-Christmas melancholy, which looks a bit difficult to achieve.
By and Large, Retail sector was facing storms in the recent past and has continued to do so. Brands like Debenhams, Halfords, and Mothercare laid down profit warnings in the last one year and have had a bleak Christmas trading. Factors contributing to tough trading conditions included softness in order scenario during the summer. But few retailers managed this well and were still able to report decent sales (Dunelm). Few retailers also benefitted from the tourist visits.
On the other hand, M&S has forecasted to have some softness in earnings in 2022 given the changing landscape of consumer spending. Meanwhile, it still believes to have a significant (30%) contribution coming in from the online sales. In fact, many retailers are expected to be on this track while physical stores might take some hit.
In the food segment, choice of foods indicate the consumption scenario for British consumers as they splurge on treats especially during festive conditions. Companies like Aldi, and other supermarkets gain attention amidst the scenario, though situation has not been simply the same as seen over the past few years.
In the current scenario, many investors might prefer avoiding few retail sector stocks given the challenging environment while FTSE general retail sector is trading at a PE multiple of close to 12 x of forecast earnings, as indicated by many market analysts and media platforms. Also, one needs to keep an eye on Bond prices too. For instance, Debenhams’ bonds have fallen sharply over worries about its financial condition.
UK retail sector in 2018 was a tumultuous one, as the sector saw a muted demand and cost pressures in 2018. But in the second half of 2018, consumers curtailed big-ticket purchases and routed their spending to non-discretionary areas and online purchases. 2018 was one of the worst years for retailers in a decade, and they are facing a tough operating environment in a decade. But consumers are still trying to manage spending, and it will reward those retailers which have an attracting consumer spending preference. As per the ONS (Office for National Statistics), all sectors excluding motor fuel stations and food experienced contraction during the festive month. In 2018, the retail sector reported a growth of 2.7 %, from their peak of 4.7% two years before.
This sets a weak platform, nonetheless, few retail segment stocks might still be in a sweet spot based on their strategic decisions and support from broader market picture.
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