British general retailers were among a handful of sectors trading in positive territory in a first-quarter stock market slump, but now look set for declines as currency effects and sagging consumer demand take their toll. On March 31, Marks & Spencer posted a smaller-than-expected fall in fourth-quarter underlying sales but remained hesitant on the outlook for the new financial year.
The FTSE 350 General Retailers index is up nearly 20 percent this year, among the top three UK sector performers after a dismal 2008, and in sharp contrast to sectors like life insurers and real estate, which are down 30 percent.
Some stronger-than-expected Christmas sales numbers at the start of the year from high street players prompted the retail sector to rally, and strongly outperform the FTSE 350 index, which is down 12 percent this year, and also saw a number of brokers turn buyers on UK retailers.
But fast-rising unemployment, a collapsing housing market and plummeting consumer confidence mean such gains will be hard to sustain. "Outperformance may continue in the near term, but I still think the sector faces major challenges on a medium/long term view. Weak consumer confidence, sterlings depreciation and overcapacity will continue to be major issues over the next year," said Sam Hart, equity analyst at Charles Stanley.
Analysts said that a bet on the sector is like betting on an economic recovery, and no one could say for sure at this stage that the equity market has seen its trough. Britains economy fell into recession for the first time in almost 20 years at the end of 2008 and is expected this year to suffer its sharpest contraction since the Second World War.
The Confederation of British Industry said last week that UK retail sales are expected to worsen further next month as the bleak economic outlook prompts consumers to cut back on spending.
"Given the recent retail sales figures, some of the shine could be removed. The decline in sterling and its impact on buying from abroad could also impact further as the year progresses," said Keith Bowman, analyst at Hargreaves Lansdown.
Last week, fashion and homewares retailer Next posted a 13.9 percent profit decline for the past year and said it saw sales and margins falling further in 2009. "In general the message here is to stick to the strongest players in the sector, and especially those who have been innovative or aggressive," said Marc Kimsey, senior derivatives trader at Blue Index.
Analysts said retailers that import their clothing ranges could suffer currency translation issues from sterlings weakness as hedging contracts unwind later this year. Nick Bubb, retail analyst at Pali International, said UK general retailers had rallied on the hope that the worst may be over and already priced in for the sector, and that things would recover from the autumn onwards.
"The other side of the coin is that the defensive food retailers have lagged somewhat. If this was a normal recession, then the government stimulus measures would be starting to work by now and all this might make sense," Bubb said.
"Unfortunately, this is not a normal recession, the economic downturn has only just begun and rising unemployment will undermine consumer confidence." Analysts said the rally by UK general retailers will soon peter out and the market will recognise the far superior sales and profit growth and property backing of the food & drug retailers.
"Our clients definitely prefer food and drug retailers for longs while we are seeing more people going short on clothing retailers. Both sets of clients are taking quick turns though - nobody is investing for the long term just yet," said Arifa Sheikh-Usmani, a senior trader at Spreadex. The FTSE 350 Food & Drug Retailers index has fallen 9 percent so far over the first-quarter as food price inflation factors have been eroded, and with the sectors defensive attractions ebbing and flowing.
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