Retailers take a hit

6 January 2009

Marks & Spencer has announced 1,200 job cuts and the closure of 27 stores as part of a package of cost control measures to help it weather out the recession.

The high street favourite has announced a 1.2% fall in sales in the 13 weeks to Christmas, with food and general merchandise taking a particular hit. Despite the fact that M&S enjoyed its biggest trading day ever on 23 December with record sales of over £50 million, and managed to maintain much of its market share during the period, the store still expects its margins to fall by 1.75% as a result of the credit crunch.

In response, it has announced cost initiatives to the tune of up to £200 million. As well as store closures and job cuts, M&S is capping its final salary pension scheme at 1% and changing the early retirement benefits for members who joined the scheme before 1996.

Sir Stuart Rose, chairman of M&S, says: "We are aware that the proposed changes set out above will be difficult for those members of staff impacted, but given that we expect challenging economic conditions to continue for at least the next 12 months we believe we are taking the right action to maintain the strength of our business."

Guy Ellison of Fortis Private Banking says: “Overall these results are not great but are also not the train smash that some had been expecting.”

M&S is not alone in feeling the chill on the high street. Both Next and Debenhams have confirmed falls in sales with depressed consumer spending hurting their profits.

Clothing chain Next says its sales plummeted 7% during the six months to Christmas Eve, and warns that 2009 is likely to be another “challenging year” with negative like-for-like sales figures predicted for the full year.

And despite the fall in sales, Britain’s second biggest department store chain reports pre-tax profit has risen over the 18 week period, although it declined to specify by how much.

A statement from Next warns that the first half of 2009 will be “particularly difficult” as consumer demand remains weak, house price falls continue and fear of unemployment cautions people against spending. In addition, it is concerned that the weakness of sterling will be a major issue for the retail sector.

Sam Hart of stockbrokers Charles Stanley, says Next is likely to be among the more resilient retailers in the current downturn.

Meanwhile, department store Debenhams has also made public its own suffering, with its figures showing the impact of consumers tightening their belts. Its sales over the past 12 weeks are down 3.3% - however, this is a slight improvement on the 4.2% drop recorded in the previous six weeks and perhaps reflects its willingness to offer discount days in-store and online.

But analysts remain cautious over the retailer's future. Ellison says: “Debenhams may well be able to conserve cash and trade its way through this economic slowdown, but sentiment towards the name will be fragile and the share price is likely to be highly volatile.”

The gamble not to discount stock before Christmas appears to have paid off for department store chain John Lewis. The retailer saw sales soar in the week before and the week after Christmas with more clothing and electrical goods purchases helping to offset falls at its home department.

Young fashion retailer New Look also managed to buck the trend with underlying sales up 2.8% for the 14 weeks to 3 January and a 1.7% improvement in its gross margin.

Unfortunately it was a different story for struggling outdoors goods chain Blacks Leisure, which saw a 3.9% slump in group like-for-like sales over the Christmas period. It has warned that its profits will now come in below market expectations.

The Christmas trading period may not have been the washout that many were fearing although analysts are quick to point out that the worse is far from over.

Howard Archer of IHS Global Insight says: “We strongly suspect that the sales effect will be temporary and that retailers will face a desperately difficult 2009. This will keep pressure on them to price competitively through next year, which will obviously impact on margins. As a result, many more retailers seem likely to go under in 2009.

“Consumers face very serious headwinds that will substantially limit their spending over the coming months despite more competitive pricing by shops, the VAT cut and lower interest rates.”

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