Inflation causes a headwind for retailers but M&S remains a ‘buy'
As Marks & Spencer and Burberry update the market, Sheridan Admans, investment research manager at The Share Centre, explains what it means for investors.
"Early morning trading saw Marks & Spencer's share price fall as it announced disappointing Q4 figures. International sales were dragged down by 2% as a result of restructuring and the impact of the European crisis on consumer confidence. However, operations in India, China and the Gulf States are still providing good support.
"UK sales were generally up but investors are concerned these figures were weaker than hoped. Direct sales saw a 22.8% increase which is encouraging for investors as retailers with a good online presence appear to be stealing the march on those that don't and we expect this trend to continue.
"Data out last week gave some hope for general retailers with the British Retail Consortium reporting sales rising by 1.3% in March compared to 2011. However, today's unexpected rise in inflation to 3.5% will continue to be a headwind for consumers and retailers alike.
"We continue to recommend Marks & Spencer as a ‘buy' for those investors who can see past some of these shorter term economic difficulties. The retailer continues to look at ways to reduce costs whilst remaining competitive and expand its overseas operations, which will see it diversify its reliance on the UK consumer over time. Marks & Spencer has a strong reputation in the UK for high quality produce at good value, a reputation that should pay dividends in this time of austerity when people will be more conscious of their discretionary spending."
Commenting on Burberry's second half trading update Admans continues; "The luxury goods company reported total revenue was up by 18% to £1,027m with the company's largest operation, retail, seeing a sales increase of 23% to £743m. Average retail selling price, retail space and sales in flagship markets of UK, France and Greater China were key contributors to the sales increase.
"Growth seekers will be pleased to hear Burberry plans to continue opening flagship stores, focusing on emerging markets and cities with high tourist inflows.
"The share price was down nearly 4% this morning despite the second half results largely in line with expectations. While US figures were strong, Asia and Europe slowed. Burberry expects six month revenue numbers to only see a small increase reflecting our concerns that sales will be affected by the European sovereign debt issues and China showing signs of a moderate slowdown. We therefore continue to recommend investors ‘hold' for now."