Shopping Trolley | finnCap Consumer quarterly sector note

Key Consumer sector themes over Xmas. On balance, there was more cause for pessimism with us concluding that a highly challenging and uncomfortable period lies ahead for most of the consumer sub-sectors, with uncertainty weighing very heavily on UK consumer confidence. On the positive side, given that lots of bad news/earnings risk had been priced in, the Xmas trading out-turn, whilst mixed across sub-sectors, was relatively benign overall.

Xmas demand came late, with mild weather affecting many categories, but the timing of the weekend ahead of Xmas Eve gave shoppers extended shopping time. As a result, the UK eating and drinking-out market saw reasonably buoyant trading, with LFL sales up +4.1% whilst the UK retail sector struggled.

According to BRC, December 2018’s UK retail sales were the weakest since 2008, with total retail sales flat (LFL sales -0.7%), but listed operators seem to have been well prepared, ending with clean stock positions despite the heightened price promotional environment across the wider retail sector.

On the negative side, as a timely reminder of the profound structural headwinds affecting the consumer sector, we found three clear themes:

(1) The most salient theme is that consumers are acting like the UK economy is in recession, despite real wage growth and the highest UK employment level on record. This is affecting spending patterns, shopping behaviour and sentiment. In general retail, we see greater evidence of consumers continuing to shop more online and at discounters, with mid-market operators losing share as a consequence. There is increasing evidence that customers are trading down on Food and General retail essentials in order to fund travel/leisure spend with holidays top of the list.

(2) BRC UK Retail Footfall data confirmed the relentless continued structural decline, with UK December footfall down -2.6%, characterised by broad-based decline across the high street, retail parks and shopping centres. This is the 13th consecutive monthly decline, with 2018 now the 7th consecutive year of declining footfall.

(3) Struggling retail/leisure operators continue to struggle even further; New Look announcing a debt for equity swap following on from last year’s CVA; HMV, Patisserie Holdings and Oddbins falling into administration; highly credible rumours that Debenhams has advanced plans for a CVA; Paperchase exploring a CVA.

Authors: Peter Smedley

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