Temperatures are set to soar in Britain this weekend, but the high street is still in a deep freeze.
Retailer Next lowered its full-year profit guidance on Wednesday, citing the worst conditions in the clothing market since 2008. The chain is not alone. Other seasoned retail executives say it’s the toughest they have seen for years.
Of course, it could just be the unseasonably cool temperatures that have deterred shoppers from stocking up on strappy tops and summer sandals. Next said while this had contributed to the challenging environment, a broader slow-down in the economy is also dragging down consumer spending.
It's puzzling. The last year or so has seen consumers' spending power swelled by lower food prices -- something that Sainsbury is expecting to continue -- and inflation-busting wage growth. And during that time the labor market has broadly tightened.
So, there's something else going on, as Gadfly has argued.
First, as Next says, Britons may be choosing to spend their money on things other than clothing, particularly cars and their homes. The company's full-price home furnishings sales rose by 7 percent in the three months to May 2.
That dynamic is echoed by Mike Coupe, chief executive of Sainsbury, which also reported full-year profit on Wednesday. He says that while Britons have more money to spend, they are choosing to use it to pay for cars, holidays and meals out: in short, outside of the shops. And, that there would be no let-up in competition in the supermarket sector this year.
Furthermore, the looming referendum on European Union membership probably isn't helping either -- dire warnings of what could happen to the economy in the event of a Brexit is encouraging consumers to think twice about some kinds of spending.
The collapse of department store BHS adds another wrinkle. If no buyer is found, then there is likely to be a significant closing-down sale, which could suck demand from other retailers. That's not great -- clothing and homeware retailers are already slashing prices to stimulate demand, and have turned the high street into a sea of red money-off tickets.
So if shoppers with all those pounds burning holes in their pockets aren't willing to splash out on new summer wardrobes or a picnic spread at big supermarkets, there's probably more trouble ahead for British retailers.
Sainsbury, where pre-tax profit before one-off items and property profit fell from 681 million pounds ($985.3 million) to 587 million pounds in the year to March 12, is about to integrate online- and catalog-retailer Argos. That will boost its exposure to spending on discretionary items, compounding the impact of BHS's troubles.
Shares in Sainsbury, which have risen by more than 10 percent this year, fell 5 percent on Wednesday. As for Next, its shares, which have fallen more than 30 percent this year, were up 4 percent on Wednesday. They trade on 11.5 times the next 12 months earnings, at an almost 30 percent discount to the Bloomberg Intelligence European specialty apparel peer group.
It looks like investors have already priced in most of the bad news at Next. But given the dim outlook across the board for British retailers, they should be prepared for some tougher times ahead.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Andrea Felsted in London at email@example.com
To contact the editor responsible for this story:
Jennifer Ryan at firstname.lastname@example.org