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UK retail: a canary in the coalmine?

Ed Monk

Ed Monk - Fidelity Personal Investing

Anyone expecting a rebound in the fortunes of beleaguered British retailers probably shouldn’t get their hopes up any time soon.

UK retail a canary in the coalmine? Debenhams profit warning

The latest grim news from the High Street is a profit warning from Debenhams, and dark talk of ‘minimising the number of store closures and job losses’ from this point onwards.

Debenhams made the warning today after seeing core sales fall 6% in the six months to 2 March.

Last week it was fashion chain Ted Baker delivering the bad news, with a profit warning triggered by higher costs and stock write-downs.  Coupled with the reputational damage assumed to follow from the departure of founder and CEO Ray Kelvin amid accusations of misconduct, Ted Baker shares tumbled.

Retailers are closely watched for several reasons. Firstly, they tend to be the companies that everyone is familiar with, so their failures tend to be bigger news than those in more obscure sectors.

Secondly, their failures leave literal gaps in our High Streets as stores close and town centres become less bustling, adding to the sense that the economy is underperforming.

Thirdly, their performance does in fact reflect wider economic performance because it is a measure of consumer confidence, and our willingness to spend money and drive the economy forward.

So - do the negative headlines from retailers hold a warning for the wider economy, or are there other factors at play?

The pain at retailers has to be seen within the context of the particular - and particularly nasty - set of obstacles affecting that sector. Many of these companies have been caught on the wrong side of the rise in e-retail and internet shopping. They have been left paying for expensive stores with all the staff and tax costs that come with them.

They also have to contend with higher expectations from shoppers who are now more used to being able to get everything they want online and who are less forgiving when physical stores don’t have what they want in stock.

These factors may well lead to more retailers failing and the harm to staff who lose their jobs will be considerable.

That need not mean, however, that the economy overall is struggling.

What’s perhaps more worrying in the retail turmoil are the weaker sales companies are reporting - even those unaffected by the revolution to online. Back in December share prices fell when Asos, one of the great online retail success stories, reported weaker than expected sales growth. It would still be positive, the company said, but rising at a more modest 15% versus forecasts of 20-25%.

Brexit has, and will continue to be, blamed for weak consumer confidence but we may also be seeing signs of a more conventional slowdown - the type that occurs as part of the normal economic cycle. Inflation has been weakening and is now below target, suggesting weakness in the economy.

The UK isn’t the only economy showing signs of weakness, of course, which is one reason why bad news like that coming from the retail sector should be treated with caution by investors. Stock and bond market performance will reflect wider economic trends in time, but short-term they can appear disconnected. Add in as well that the UK stock market in particular is very international facing, and therefore less dependent on the UK economy.

It’s a good reminder, however, that a properly diversified portfolio will be spread across the globe, with only a minority allocation to the UK.    

More on Debenhams, Ted Baker and Asos.

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