- Retail sales up 0.3% in July, following a fall of 0.2% in June.
- In the three months to July, sales volumes fell by 1.2% when compared with the previous three months; this continues the downward trend since summer 2021.
- Non-store retailing (predominantly online retailers) sales volumes rose by 4.8% in July 2022.
- Feedback from online retailers suggests that a range of promotions in July boosted sales.
Charlie Huggins, Head of Equities at Wealth Club said:
Pressure on UK consumers is mounting and is only likely to build in the coming months. It’s arguably the most difficult environment facing UK retailers since the financial crisis. But some retailers look better placed than others to deal with tougher times.
Retailers that can offer exceptional value for money could be set to take a greater share of consumer’s wallets, as more people start to tighten their belts. Primark, owned by AB Foods, could be a beneficiary. The group has form in dealing well with difficult economic circumstances – during the financial crisis Primark was one of the few retailers to maintain positive like-for-like sales. There are few retailers better positioned to cope with tough times.
Next has a more mainstream proposition, so will probably be more impacted than Primark in a consumer downturn. Even so, the group looks better positioned than most of its peers. This is due to its very strong balance sheet, high margins, and robust cash flows; all of which provide a valuable cushion in times of hardship. The group is also stewarded by the highly adept Simon Wolfson, who has great experience in navigating choppy waters. In summary – if the consumer catches a cold, Next will feel it. But it’s unlikely investors will lose their shirt, given the resilience of its business model.
On the other hand, retailers that lack a distinctive proposition or those with fragile business models could be in for a rocky ride. Marks and Spencer’s clothing and home business lacks the value credentials of a Primark, and its margins fall well short of that of Next. This suggests it could be much less resilient in a downturn. Businesses like Asos and AO World are arguably even more vulnerable. Their online-only businesses models are complex to manage and generate poor margins; not a great combination at any time, but especially when consumer spending comes under pressure.
One thing is for certain. Against such a challenging backdrop, investors in UK retail need to be even more picky than usual.
