October 31, 2017

Pegler’s market report – 31.10.17: A word about the retail sector and consumer demand

As published in the Brighton Argus (31.10.17) Business section under the title Pegler’s Market Report:

A word about the retail sector and consumer demand

Profits at Debenhams slumped 44pc to £59m last year despite strong sales in its beauty and food divisions. Debenhams is now focused on sprucing up its beauty halls and services to lure more shoppers and recently bought a minority stake in blow-dry business Blow Ltd, which will expand its at-home service across the country and open salons inside Debenhams shops. The department store chain also announced a partnership with mobile business Mobify to speed up its mobile websites and said that it would trial two Sweat! gyms as a way to fill excess space in its shops. Sergio Bucher, who has now been at the helm of the retailer for a year since joining from Amazon Fashion, said that the business had made “good progress” on his “Debenhams Redesigned” strategy.

The retail sector suffered a sharp slowdown in October with sales volumes falling at its steepest pace since March 2009, the CBI’s distributive trades survey reported. Half of the retailers surveyed reported that sales volumes have fallen in October compared to a year ago, with just 15% saying sales had increased – a net balance of minus 36%. Department stores, specialist food and drink retailers and motor traders said their sales were down.

By contrast, in the September CBI survey a positive balance of 42% of retailers reported sales growth.

The CBI concluded that retailers are beginning to feel the pinch from higher inflation and recent data points to a marked softening in consumer demand.

However, preliminary data for the UK economy showed quarterly growth of 0.4% in the three months to September, up from 0.3% in both the first and second quarters of the year. The slightly higher-than-expected figure from the Office for National Statistics was seen as increasing the chance of the Bank of England raising interest rates over the coming days.

Meanwhile data from UK Finance – formerly the British Bankers’ Association and UK Cards Association – found that savings balances at the big banks grew at their slowest rate since the financial crisis, with many customers also making withdrawals from their ISA accounts. Total cash ISA balances fell by £900million in September, the fifth monthly fall in a row.

At the same time, unsecured borrowing continued to rise, with credit card borrowing from banks up 5.5% over the year.

Other company news included a weakness in profits for the Costa coffee chain, which hit parent company, Whitbread. Lloyds reported good quarterly results, offset by pressure on the amount of capital it is expected to hold. For investors in rival Barclays there was less to cheer as its third quarter numbers came in below expectations. Profits for the quarter rose to £1.1bn, up from £837m in 2016. But disappointing performance from its investment banking division meant revenues fell short of consensus expectations.

By David Pegler, Brighton Capital Management