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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
It is something of a January tradition. As the fog of Christmas lifts, UK investors study festive trading updates from major retailers to divine clues about economic activity — and the year ahead.
Weakness was the overriding theme this week, as consumers grappled with higher prices for goods and services. Retail sales grew by just 1.7 per cent in December compared with last year, the British Retail Consortium said. Put simply, people are buying less stuff. Purchases made are becoming more sensitive to elevated prices.
For retailers, price and volume are what counts — and managers must often choose which to prioritise.
Higher prices tend to mean fewer items sold but meatier profit margins. Achieving a balance between the two is difficult at the best of times. Now the retail pie is shrinking, in real terms at least. The figures over Christmas suggest rising competition with discounting winning over shoppers.
Food retail exemplifies the situation. Consumers are trading down to cheaper products. Sales at discounter Lidl rose 15.3 per cent in the three months to December, faster than any other UK grocer, researcher NIQ said this week. Food volumes overall were just 1.2 per cent higher in the period than in 2022. Along with peer Aldi, the two now account for a fifth of market sales.
Those unable to offer a bargain may have suffered. Shares in JD Sports fell by as much as a quarter last week after it said sales for the coming year would be lower than expected, and flagged weak Christmas trading. In part, the trainer and tracksuit retailer blamed high prices imposed on it by Nike.
This annual reading of retail tea leaves owes at least something to the fact that there is often little other relevant news for dissection in the early weeks of the year. Share prices can react. But how useful these updates are in terms of predictive power for gauging the year ahead varies.
An analysis of share price movements in the first three weeks of the year suggests that Dunelm and retail darling Next correlate most strongly with full year performance.
Whatever the shares do at the start of the year has in the past been a better guide of what will happen in the rest of the year — and not just for the individual shares and for the sector more broadly. Next’s retail bellwether status, on the back of consistently good management, appears well-founded.
Next shares are already 5 per cent higher this year, following a typically robust market update. Lord Simon Wolfson, chief executive, said full price sales rose 5.7 per cent last year. Next expects the figure to moderate to 2.5 per cent for 2024 with profit growth of 5 per cent.
But Next has only missed its profit guidance given in January once since 2015, and that was for 2020 when shops actually closed. Dunelm will shed more light on the situation when it reports next week. A decent Christmas there, and a boost for the shares, could indicate that this year won’t be too dismal after all.
How Abercrombie got its style back
Abercrombie & Fitch is also bucking the trend of general retail malaise in the US. An ability to persuade middle-aged shoppers to retread the choices of their youth helped its shares quadruple last year, to an all-time high. In doing so, the retailer — once part of the Les Wexner empire — captured the attention of the bright, young things on Reddit forum WallStreetBets.
To quote the analysis of young_jason: “They rebranded from clothes for hot people to entry-level luxury and it’s been a huge success.” Abercrombie made its name in the 2000s as a shopping mall destination for trendy teens. Success was aided by parental disapproval of the sexualised advertising that became its trademark.
The retailer then endured a long period in the wilderness. Its renaissance, as the current chief executive recently explained to investors, stems from a more classic, less edgy style that appeals to a demographic aged between 20 and 40.
At the same time, the rally in sales has been accompanied by sharp efficiency gains that have accrued to its equity value. This is no mean feat in the fickle world of fashion. Gap, another yesteryear icon, has repeatedly failed to rediscover its previous magic.
In the most recent quarter, like-for-like sales at Abercrombie jumped 16 per cent. Its gross margin and operating margin reached 65 and 13 per cent, respectively. Both were even well ahead of Abercrombie’s 2025 goals. The retailer this week raised its guidance for fourth-quarter sales growth to the high teens.
As the business was growing, the company was able to run with a lower level of stock. This reduction in working capital investment then boosted cash flow, allowing Abercrombie to pay off portions of its debt.
Even after the run-up in its shares, Abercrombie is still a good fit. Its forward price to earnings multiple has jumped from nine times to 15 times in the past two years. But that only puts it in line with rivals Gap and American Eagle Outfitters.
The rapid rise of Abercrombie, along with Reddit’s attention, smacks of meme stock status. But unlike the “to the moon” trajectory of cinema chain AMC or retailer GameStop, its ascent reflects clear operating achievement rather than social media frenzy. Any fashion revival can be fragile. But Abercrombie shareholders, and customers, should enjoy their comeback.
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