It'll be a grim Christmas for retailers

“Buy when there’s blood on the streets,” goes the saying – and some may well feel it applies to the retail sector just now. But it makes more sense to buy heavily discounted goods than faltering retail stocks.

"Buy when there's blood on the streets," goes the saying and some may well feel it applies to the retail sector just now.

There may not be rivers of crimson running down your local high street, but shops are certainly slashing prices. Winter coats at French Connection are down from £160 to £80, £150 Samsung cameras at Comet are selling for £99, you can get up to 50% off a range of clothes at Laura Ashley, BHS and House of Fraser and it's not even sales season yet.

Shops are having to resort to desperate measures to bring in customers more worried by the state of the economy than the variable merits of Fendi versus Louis Vuitton. According to Footfall, a retail research firm run by Experian, the number of shoppers visiting retail outlets fell 5.9% on 13 December compared with a year earlier. That follows a 5.9% fall on 12 December and a 0.9% drop on 10 December.

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It's since picked up as retailers cut prices, but "it is unlikely that UK retailers will be able to recoup the damage already caused", Experian's Martin Davies said in a statement.

Analysts have thus begun downgrading retail stocks across the board as worries over falling house prices, rising mortgage bills and mounting inflation have convinced consumers that now is not the time to start throwing money around.

The most recent consumer confidence survey from the British Retail Consortium showed that more than a third of consumers cited the economy as a major worry for the next six months, up from 22% a year ago.

As that anxiety has worked its way onto high streets up and down the country, it looks like fashion stores will be the most affected. But more concerning is a recent statement from Character Group (CCT), one of Britain's largest toy firms, which owns the licensing rights to TV hits such as Doctor Who.

The group warns that sales for the four months to 31 December will be 18% down on the same period last year. With less than a week to go to Christmas, that's a pretty shocking announcement from a toy company particularly as gifts for the children tend to be the last thing to go when households cut back.

Some think that fears for the sector are overdone. As Citigroup pointed out in a recent note, "contrarian investors may be looking for value in a sector with a one-year forward p/e of 10.9 times". That compares to a slightly higher 12 times p/e in 2004/2005. But the report's authors are not convinced. With "the property market just rolling over, all the indicators point firmly downwards".

We'd have to agree. Credit is not as readily available as it was in 2005, so even if consumers do want to splurge, they're unable to. "We believe this is the start, not the end, of a slowdown in retail spending," Matthew McEachran, an analyst at Kaupthing Singer & Friedlander, said to investors this week. "Investors should not buy general retailers short term. Even the most tightly run retailers will get caught up in the turmoil between now and the end of the January sales." On Monday, the 20-member FTSE 350 General Retailers Index dropped 3.7% to 1,863.1, its lowest close since 2 February 2004.

That's unlikely to be the end of the decline. "With petrol prices racing past £1 a litre, food prices on the increase and the prospect of higher mortgages and loan fees on the horizon resulting from the credit crunch, even the most optimistic seem to view their glass as half empty'," says Rachael Joy of GfK NOP, a market research group.

Indeed, it's nigh on impossible to find any cheery retail news, with one notable exception. Department store giant John Lewis "stands as a beacon for the power of multi-channel retailing", says Pali International analyst Nick Bubb. Sales have risen to £100m for the first time ever, says the firm this week, up 7.7% as sales from its online group soar.

But unless you're a Lewis's employee, there's no way you can profit from its bumper season. The company is run in a mutual structure, with the 64,000 staff known as partners. Last year, each partner' pocketed an average of £2,000 each.

And with this week's pick up in sales unlikely to make up for the past few months of poor trading, we think there are far harder times to come for retailers.

It will be quite some time before investors should even consider getting back in to the sector. In fact, we believe the best way to make money from retail this year is to forget buying shares and just enjoy the discounts on offer see below for ideas.

Christmas shopping tips

The best way to make money from retailers this Christmas is to avoid investing in the sector and instead take advantage of the discounts they are using to coax reluctant consumers to spend.

Discount vouchers with promotional codes issued over the internet have become a popular method of drawing custom you can get a comprehensive list of codes by going to MyVoucherCodes.co.uk, says The Guardian.

Jody Clarke

Jody studied at the University of Limerick and she has been a senior writer for MoneyWeek for more than 15 years. Jody is experienced in interviewing, for example in her time she has dug into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.