Next, Dixons Thrive as Morrison Struggles With Discounters

  • Contrasting fortunes for U.K. retailers as rate decision looms
  • Prospect of higher wage costs weighs on outlook for industry

Amid concern over increased wage costs and supermarket price wars, some U.K. retailers are prospering.

Next Plc on Thursday reported first-half profit that beat estimates as the strong pound helped the fashion retailer’s buying teams hold down garment costs. Dixons Carphone Plc, the owner of the Currys and Carphone Warehouse chains, posted a bigger-than-anticipated jump in first-quarter sales after grabbing a larger slice of mobile-phone spending.

The strength of their performances was in contrast to difficulties being experienced in other parts of the industry. Wm Morrison Supermarkets Plc, struggling to fend off the advances of discounters Aldi and Lidl, reported a 35 percent slump in first-half earnings and said a turnaround under new Chief Executive Officer David Potts won’t be quick. Sales at Home Retail Group Plc continue to drop at its Argos chain and the company warned that the peak Christmas season is harder to predict than normal.

“As ever in the retail world, there are people who will complain about the market conditions and others who just go out and grab it,” said Phil Dorrell, an analyst at consultant Retail Remedy.

Dixons Carphone rose 1.9 percent to 427.80 pence at 11:25 a.m. in London, while Next advanced 2 percent to 7,825 pence. Morrison slid 3.5 percent to 169.70 pence and Home Retail declined 5.6 percent to 140.40 pence.

Wage Costs

The prospect of higher wage costs is among the main issues clouding the outlook for the industry. Beginning in April, all U.K. companies will be required to pay 7.20 pounds an hour to workers over the age of 25, compared with a current minimum wage of 6.50 pounds.

Next said Thursday it can offset the impact by increasing prices 1 percent, and that the burden is manageable. For Home Retail, a product range that spans televisions, garden furniture and jewelry means raising prices “isn’t such an obvious lever,” Finance Director Richard Ashton said on a call.

Falling food prices also represent a challenge, one that Morrison said it expects to continue as consumers migrate to discounters and shop more frequently. A turnaround at Morrison will require “sustained investment in improving the customer shopping trip,” CEO Potts said Thursday, almost six months after joining the grocer.

For Dixons Carphone, the merger that created the company and last year’s collapse of main competitor Phones 4U are helping the retailer grab an ever-increasing share of the mobile-phone market. Same-store sales rose 10 percent in the U.K. and Ireland during the 13 weeks ended Aug. 1, it said Thursday, compared with the median analyst estimate for an increase of 7 percent.

“Dixons have worked hard on their format and their delivery to improve their figures,” Dorrell said.

Economic Outlook

Retailers may get a further boost from low inflation and faster wage growth that bolsters consumer spending. Bank of England policy makers said Thursday that the U.K. economic outlook remains healthy and market turmoil related to China’s slowdown hasn’t shaken their view that the time for an interest rate increase is approaching.

“A rise in consumer confidence, real wage growth, and higher disposable income are all potentially positive for food retailers,” Morrison’s Potts said.

John Lewis, Britain’s largest department-store company, struck a less optimistic tone on the market outlook after reporting a 26 percent decline in first-half profit.

“Conditions in the market will remain difficult, especially in grocery where there is little sign of any price inflation,” Charlie Mayfield, chairman of the employee-owner retailer, said in a statement.

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