Post-Xmas results show retail sector avoided “Armageddon”

Despite the recessionary environment, 2009 saw most areas within retail enjoy like for like sales down just a few percentage points over the year.

Sales for ‘big ticket' retailers were the poorest performers early in the year, which was expected whilst nervous consumers avoided expensive purchases.  The second half of 2009, and so far in 2010, has seen analysts upgrade profit expectations across the sector, as forecasts seemed too conservative.  Furthermore, falling mortgage rates and utility costs, coupled with a slowing rate of increase in unemployment, mean that many consumers are now better off.

Catherine Stanley, manager of the flagship F&C Stewardship Growth and Stewardship Income funds, commented: "It's fair to say that the UK retail sector did not suffer the Armageddon many predicted for 2009.  Sales in late January 2008/early 2009 were generally poor, making for easy comparatives, so like-for-like sales increases for the sector have looked good so far in this year's important January trading updates.  Furthermore, margin performance has been good year-on-year across the sector as retailers have entered the January sales with much lower stock positions, having planned more conservatively than they did last year".

Nevertheless, the sector has so far reacted ambivalently to the positive trading updates.

"Next - usually a good sector barometer - recently announced upgrades to profits on reported like-for-like sales increases of +3.2%, and yet their stock still fell.  This indicates that whilst the market anticipates upgrades in advance, it remains nervous on the consumer outlook for 2010 and 2011.  We expect further upgrades in the short term, however with fiscal tightening inevitable from the next government, the consumer is likely to come under greater pressure in the second half of this year", Stanley concluded.

Whilst larger cap retailers are mature with little medium term growth prospects, Stanley believes several mid and small cap retailers, such as Dunelm, have considerable opportunities to grow their earnings.