2015's festive shopping season has been positive for some retailers, but in contrast very tough for many others. It seems to be a case of picking the right retail subcategory, given the sharp differences in sales performance over the last month or so.
The Good: UK consumers have been spending money
Britons planned to spend £868 per person on Christmas, including nearly £600 per household on gifts (Chart 1). While this is a huge amount, by far the largest in Europe, it is essentially flat on 2013 and 2014.
Households have also been buying cars aplenty: UK new vehicle registrations have been on a tear since 2011, far exceeding the 2.4 million cars sold in 2007-08 (Chart 2).
So clearly this is a huge category for growth in consumer spending, helping UK quoted car dealership companies such as Lookers, Inchcape and Pendragon.
The Bad: Price deflation remains rampant
Effectively, while consumers may be buying more in volume terms, the issue for the Retail sector is the continued fall in shop prices, fuelled in no small part by the increasing penetration of online shopping (now up to 15% of all ex-fuel, ex-auto UK retail sales now).
According to the trade body The British Retail Consortium, UK high street prices have now fallen for 32 consecutive months, with December shop prices some 2% lower than a year ago.
While the pressure on food prices is long-standing thanks to competition from German discounters like Aldi and Lidl, note the even more evident pricing pressure in non-food retail, where high street prices in December were 3% lower than a year ago (Chart 3).
The Ugly: El Nino weather effect hits Next and Bonmarche
While we have all been enjoying relatively balmy weather this winter as a result of the strongest El Nino weather cycle on record (2015 is likely to be the warmest year on record), it has been decidedly bad news for clothing retailers.
In the UK, the provisional mean temperature for December 2015 was 7.9°C, some 4.1°C above the 1981-2010 average according to the UK Meteorological Office. The result of this has been a poor winter selling season for clothing retailers, who have struggled to shift their stock of winter coats, gloves and boots.
We have already seen profit warnings from clothes retailers like Next (code: NXT) and Bonmarche (code: BON) in the UK. I would expect more from their clothing retail peers such as Marks & Spencer (code: MKS) in the days ahead.
Late Christmas Present for Home Retail shareholders
On the other hand, the New Year is already proving very profitable for Home Retail shareholders, who saw Home Retail's (code: HOME) share price leap from 100p at year end to 131p today (Chart 4) on the back of a rebuffed bid from Sainsbury's (code: SBRY).
A note for those who are unfamiliar with Home Retail – it is the holding company that owns both the catalogue store Argos, and DIY and decoration chain Homebase.
With private equity buyers also reportedly waiting in the wings to buy part of or all of Home Retail, there is perhaps considerable industrial logic in Sainsbury's buying Home Retail in order to combine its own operations with the Argos store chain and aggressively grow its click-and-collect service (competing more with Amazon in this way).
Sainsbury's would likely then offload the Homebase DIY chain to private equity buyers given the lack of obvious synergies with Argos or indeed with supermarkets. Note that even after this sharply higher share price, Home Retail remains very cheap when judged on classic valuation measures such as price/sales.
The bottom line: Like Home Retail now, Next soon too
While I would stay away from clothing-related companies such as Marks and Spencer, I think that Home Retail could hold promise for investors given the ongoing takeover story.
I would also watch Next closely with a view to picking up their shares in the near future. The weather-related issues are temporary, while Next has demonstrated an admirable record of growth in the longer-term, and is currently much cheaper than it has been for a long time.
Edmund Shing is Global Head of Equity Derivative Strategy at BNP Paribas in London. He holds a PhD in Artificial Intelligence.