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Happy New Year and welcome back to our end of the week round-up of UK large-cap news. The RNS is still pretty quiet - although Next (LON:NXT) and B&M European Value Retail SA (LON:BME) showed up their peers by proving that it is possible to release a Christmas trading update in the first week of the new year. We’ve also had a useful update from across the pond: Walgreens Boots Alliance (NSQ:WBA) (which owns the eponymous pharmacy chain) has announced a strong set of numbers for its fiscal first quarter against a tough comparison last year.
There are three interesting insights we can gain from these updates which we will dive into in this article:
But first an overview of the announcements themselves.
The Next trading update was its annual masterclass in managing expectations. After a better-than-expected Christmas-trading period (full priced sales up 4.8% in the nine weeks to 30 December), management has increased its full year pre-tax profit guidance to £860m (up 4.5% on last year). Interestingly, that is bang in line with the FY2023 guidance management gave this time last year - as Paul pointed out in his overview of the trading update earlier in the week, the management team at Next has excellent oversight of the business which means they are able to provide a remarkable level of detail on the outlook.
By contrast B&M’s December quarter update was a little light on detail, but similarly strong on the revenue front. In the UK, like-for-like sales were up 6.4% in the December quarter, helping offset weakness in the division earlier in the year. In the financial year to date (B&M’s financial year ends in March), UK revenues are now slightly up on the previous year.
In the US, we’ve had quarterly numbers from Walgreens Boots Alliance (which includes results for its UK retail business). Boots revenue rose 4.3% in the quarter ended December 2022, thanks to high footfall across its flagship retail stores and travel locations.
Online channels were a saving grace for retailers during the Covid years, but in 2022 they provided some tough comparatives.ASOS (LON:ASC) and Boohoo (LON:BOO) for example - long-time darlings of AIM - had a miserable 2022 and so did their shareholders. With negligible revenue growth and rising costs sending profits into the red, both companies endured share price declines of more than two thirds.
In years gone by a decline like this might have provided an entry point for new investors who have always been put off by the e-commerce sector’s stretched valuation. But this week’s update from Next suggests that the bad times might not yet be over for online retail. All of the company’s sales growth came from physical stores with management suggesting that it might have underestimated the impact Covid was having on in-store shopping in late 2021. That suggests that FY2021/22 may have in fact been a relatively good one for online retail. But in the last twelve months Asos and Boohoo generated revenue growth of +0.6% and -4%. Boohoo doesn’t tend to comment on its Christmas trading, but Asos is due to announce next week - then we will learn whether the near term outlook is even more grim than feared.
On the positive side, the physical retailers which are set to report over the next few weeks could provide their shareholders with some nice surprises. Marks & Spencer (MKS) will release its Christmas trading update on Thursday 12 January (the same day as Asos) - it will be quite a turnaround for this ageing giant to outgrow the tech-focused upstart which generated compound annual sales growth of 15% between 2017 and 2021.
The UK is forecast to officially be in a recession by the end of the first quarter of 2023. There’s little evidence of that in the retail numbers we’ve had so far this week (unless you consider the reason for higher spending on winter coats is because people can’t afford their heating).
It’s not just the retail numbers which show signs of continued enthusiastic spending in the UK. High street footfall was high over the Christmas period and restaurants fully booked. This may be a sign of Brits continuing to spend their Covid-savings. That isn’t necessarily a bad thing because once the coffers are dry, inflation might start to retreat.
It’s that pesky inflation and the weak sterling which gives Next management cause for caution in their outlook. Other retailers, especially those with lots of staff will probably flag the same fears. And those high costs are going to be passed onto consumers. Next says its own goods will be about 8% more expensive in the spring and summer and then about 6% more expensive in the autumn and winter. That may eventually spark a decline in spending. Next’s one-year-out forecasts (for full priced sales to be down 1.5% in the year to January 2024) might be bang on, again.
B&M’s uptick in fortunes in the second part of the year could be a symptom of increased demand for value goods. As a value retailer it looks well placed to weather an economic downturn.
Greggs (LON:GRG) , which also released a positive Christmas trading update this week, is in a similar position. Its sandwiches and pastries are significantly better value for money than its high street peers - you’d be hard pressed to buy lunch for less than £10 in Pret. Like-for-like revenue rose 18% in the final quarter meaning the company is on track to report a 17% increase in sales fr the full year. With more ambitious store opening plans, Greggs good value offering could be in increasingly high demand in 2023. We covered the stock in detail recently here.
But there is also an argument to be made about a recovery in the high end luxury sector. The re-opening of Chinese tourism might be a boon for the luxury goods retailers which have struggled to regain momentum following Covid-19 lockdowns.
Retail in general had a tough time in 2022. We’ll be watching the trading updates closely in the coming weeks for any signs of strength, which could make current valuations look like interesting buying opportunities.
About Megan Boxall
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We shouldn't forget the impact of inflation here. With RPI at ~14% an increase in profits of 4.5% is actually quite a significant reduction on an inflation adjusted basis. And one that is (in my view) strongly supportive of us being in a recession (I.e. negative real GDP.). So I guess I would disagree with the conclusion.
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Any inside views on the retail motor trade? Looks great value with the big dealer groups but not good for the on line only guy's such as Cazoo and Cinch. Is this area a good indication of what may be ahead for 2023 ?