Struggling UK stores pin hopes on Christmas sales

London: UK retailers are facing a nail-biting week. With Christmas falling on Sunday, the coming days will make or break their festive trading, which can account for up to half of non-food retailers' annual profits.

Already, store groups are bracing themselves for a poor Christmas, raising the prospect of a string of profit warnings and casualties. "I think that Christmas is going to be very difficult," says Richard Hyman, strategic retail adviser to Deloitte. "Retailers are going to find that they have not got as much cash in the tills as they would want, and in some cases need."

Store groups are facing a toxic combination of squeezed consumers and a warm autumn, leaving them with unsold coats, boots and knitwear. Christmas 2010 was marred by heavy snow. This year, many had expected an automatic uplift, given the easy comparisons.

"There have been some times when it was better than last year, and quite a lot of times, when it has been worse. That probably represents in total disappointment against initial expectations," says Tony Shiret, analyst at the Royal Bank of Scotland.

One leading retailer says this Christmas shopping season has the ring of 2008, when consumer spending stalled after the collapse of Lehman Brothers. "It's not an entirely dissimilar environment," he says.

Forecast

Deloitte forecasts that food and non-food retail sales in December by value, excluding fuel but including VAT, will be flat to slightly lower than last year. This compares with a 1.9 per cent increase year-on-year in December 2010.

December 2009 saw a 3 per cent increase, although this was from a weak Dec-ember 2008, when sales by value rose just 0.3 per cent year-on-year.

Sales figures from John Lewis have also pointed to a tough environment, although the department store chain is expected to be one of the Christmas winners. But it is not just concern over sales that is unnerving investors and analysts. Fears are growing that heavy discounting will eat into profits.

Promotions

"The high street is the most promotional we have seen since late 2008," says Andrew Hughes, analyst at UBS. Only a few retailers — including Next, Inditex's Zara chain and Fat Face, the casual fashion retailer — have held back from discounting.

"It is important for customers and for the price integrity of our product... we are not going to go on sale before Christmas," says Anthony Thompson, chief executive of Fat Face.

When it comes to individual retailers, trade at supermarkets is expected to hold up, although anec-dotal evidence suggests that last week was slower than expected. Their non-food sales are also likely to remain difficult, and Tesco says it has started a "chain reaction" of discounting with its £500 million of price cuts.

Wm Morrison is expected to be a winner, given a number of initiatives put in place by Dalton Philips, chief executive, and the fact that it sells less non-food items than its big four rivals. Booker, Britain's leading cash-and-carry wholesaler, has also been trading well throughout the year.

Cautiously optimistic

Mike Shearwood, chief executive of Aurora, the privately held group that owns Oasis, Warehouse and Coast, says he is "cautiously optimistic" on the Christmas trading period, with innovations in its online service helping.

But, concern is rising over Marks and Spencer's first Christmas under the full control of Marc Bolland. UBS has sliced £20 million from its estimate of M&S's full-year pre-tax profit, after heavy discounting by the high street bellwether.

For others, Christmas will be even more crucial, with holiday sales possibly making the difference between life and death.

Peacocks is working on a restructuring of its £240 million of net debt, while Blacks Leisure has put itself up for sale, in a last-ditch effort to avoid administration. HMV, meanwhile, is expected to need to raise equity in the new year and close stores.

On the bright side, one retailer suggests many forecasters have overlooked consumers' windfall from the warm autumn, as they did not need to put their heating on in October and November and this could produce a surge in sales with nearly a full shopping week left.

But, according to Hyman, this will not be enough to save Christmas: "We will get a last-minute uplift. The problem is trade has been too weak for too long."

— Financial Times