Upheaval on the high street

published 2 October 2014

Bad news is coming thick and fast in the retail sector. While there is no sign yet that the recovery in household spending is going into reverse, several poor results or profit warnings have unnerved investors in recent days.

After last week's profit warnings from Tesco and Tate & Lyle, Next said this week that the unusually warm weather in September had dented sales growth. Revenue will only rise 6% year-on-year in the third quarter, rather than 10% as previously flagged.

The news wiped 4% off the shares and hit the share prices of other retailers, notably Marks & Spencer and Debenhams. Meanwhile Sainsbury's reported a third successive quarter of falling sales. Like-for-like sales slid by 2.8% in the three months to the end of September.

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What the commentators said

"It is retail 101", said Robert Cole on Breakingviews.com, that "if summer's lease gets an extension, clothes retailers are bound to feel the heat". Shops always stock up on warm clothes in the late summer.

The sun and absence of rain we have had the driest September since 1910 will hardly have prompted people to stock up on winter woollies. So why were investors surprised? "The market reaction reveals a bizarre streak of inefficiency at work."

Investors may have been so rattled because Next is the retailer "most likely to surprise on the upside", as Alex Brummer noted in the Daily Mail. The spotlight has thus fallen on other retailers who have struggled of late.

In M&S's case, you can see why there are jitters. It has reportedly lost another sliver of the women's clothing market and there are fears that the new "all-singing-and-dancing website has thus far failed to capture the imagination."

Sainsbury's results, meanwhile, are a reminder of the supermarkets' "car crash", as Shore Capital's Clive Black puts it. They are facing the growth of internet retail, squeezed consumers, and the emergence of the discounters Aldi and Lidl.

"Sainsbury's is a cleaner proposition" than Tesco or Morrisons, however, said Jonathan Guthrie in the Financial Times. It lacks Tesco's "obsolete hypermarkets", and unlike Morrisons was reasonably quick to establish a presence in two crucial subsectors online shopping and convenience stores. But it is as exposed to the discounters. Sainsbury's is about to embark upon a strategic review. It could be hard work.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.