Festive spirit in short supply for retailers

Will it be another cold Christmas on the UK high street? Retail analyst Richard Ratner of Seymour Price sent a shiver down the sector's spine last month, warning that stores were "teetering on the edge" of their worst seasonal sales for 25 years. He said that interest rate rises and sharply higher utility bills had begun to impact on consumers. Reports suggest that an unseasonably mild autumn has already caused trading at fashion outlets to drop 10% to 20% from the same period a year ago, while a "wider malaise" has also affected sales at chains such as WH Smith and Boots.

Ratner predicts that even more pre-Christmas discounting than previous years will follow as retailers attempt to clear stock. Woolworths (see below) has already borne out his forecast that a series of profit warnings will emerge in the next few weeks, as sales and profit margins fail to meet forecasts.

So is Ratner being overly bearish? Certainly, there are already plenty of bargains available; WH Smith last month offered a one-day-only discount of 10% on all goods, while many stores, such as Threshers, Habitat, Gap, Next, Selfridges, Oasis and Muji have tried to kick-start pre-Christmas trade by sending out email vouchers offering hefty discounts to potential customers. Meanwhile, the most recent retail report from the Confederation of British Industry (CBI) confirmed that November's retail sales came in well below hopes for the second month running, while the Retail FootFall Index showed shops had 7.3% fewer customers than last year.

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However, the CBI report was rather less pessimistic on the outlook, predicting that the onset of colder weather would "see excitement building again to Christmas". A one-day traffic ban in London's West End last weekend may have helped; more than a million shoppers descended on Oxford Street and Regent Street's stores last Saturday.

And not all stores are being forced to cut prices. Marks & Spencer, which continues to enjoy a revival under the stewardship of Stuart Rose, has indicated that it will employ a similar policy to 2005 when its winter sale

did not begin until after Boxing Day. John Lewis recently reported sales in its stores for the week ending 2 December were 6% up on the same period last year and 13% ahead of 2004.

The British Retail Consortium (BRC) is also fairly upbeat. Although director general Kevin Hawkins predicts "a white-knuckle ride" for some chains, the BRC has pencilled in a figure of £33bn for total retail spending this month, or a 6% increase on December 2005. Even the pessimistic Ratner expects bumper City bonuses will mean a successful Christmas for names at the luxury end of the market, such as Harrods, Burberry and jeweller Theo Fennell.

But for the stragglers, competition from supermarkets, the travails of cash-strapped consumers and the growing popularity of internet shopping threaten a very bleak Christmas indeed. Two in every five gifts are likely to be purchased online this year, while Interactive Media in Retail Group estimates that Britons will order an estimated £183m worth of products on the internet, up from £131m last year. So which high-street stalwarts face a bleak new year? We review three of the most likely candidates below.

Three retailers Santa is likely to forget

Novelty items such as chocolate fountains haven't been enough to shore up the fortunes of Woolworths (WLW, 34p) this year. Earlier this week the group was forced to admit that recent sales are down 6.5% on last year. The share price has been propped up to an extent by hopes that Iceland's Baugur may bid for the group, following Apax's abortive £837m bid in 2005; but on a forecast p/e of 19.5, the shares currently look far too expensive.

Woolworths blamed its woes on aggressive price cutting on CDs and DVDs and the growth of music downloads. This doesn't bode well for rival HMV (HMV, 164p), which also owns book chain Waterstone's. Both felt the heat in 2005 from supermarkets and internet rivals; this year HMV has slashed the price of many DVD bestsellers from £12.99 to £9.99 and may be next with a profit alert.

Once a mover and shaker in the fashion sector, Next (NXT 1784p) has been flagging as arch-rival Marks & Spencer revitalises its ranges, ramps up its marketing and modernises its stores. The group has been trying to lessen its reliance on fashion by introducing more non-clothing lines, but with Tesco putting its clothing range online from this month, Next may have to make greater efforts in future just to stand still.