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UK retail: survival of the smartest?

Daniel Lane

Daniel Lane - Fidelity Personal Investing

We’re on the cusp of the final third of the year; a time when school blazers are a shade too big, the heatwaves subside (hopefully) and the UK’s retailers begin ramping up their promotional efforts.

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After a particularly bleak season for retail last year investors will be watching to see which companies, if any, can make it through the period intact. And if the tail end of 2018 taught us anything it’s that no retailer is safe. Even seemingly untouchable online favourite ASOS struggled after a tough November, with shareholders taking a hit.

In more serious cases Homebase, Mothercare and Carpetright have restructured, shedding hundreds of stores between them, and the likes of Toys R Us and Maplin have disappeared altogether.

The overall malaise has meant that, as we enter the most important time of year for many retail businesses, the number of empty shops on UK high streets stands at over 10% - the highest level since January 2015.

The troubling thing for a lot of firms in the sector is that consumer spending, in the face of the UK’s impending departure from the EU, is not looking good. The most recent figures from the British Retail Consortium showed consumer spending fell to a new low in July.

We should be feeling better off though. Employment data released earlier this month from the Office for National Statistics (ONS) shows more of us are in work than at any time since 1971. But despite earnings growth of 3.9% excluding bonuses, the highest rate for 11 years, UK households are just not hitting the high street.

Average sales over the year to July rose by just 0.5%, meaning many businesses face an uphill struggle in attracting activity in store and online. So, what have retailers been doing to prepare for the imminent discount race and a consumer with Brexit in mind?

Today’s update from WH Smith gives us an idea of one way to tackle problems on the high street - get out of it.

The stationery and newspaper chain this morning pointed to positive performance in its airport and railway station outlets, as it reiterated expectations to hit annual targets.

Its high street stores had seen declines in footfall and revenues but an international footprint of 1,400 stores worldwide, with 428 outside the UK, means foreign outlets have been able to make up for weakness at home.

Casual dining chain Loungers also reported positive figures this morning. The AIM-listed company joined the UK’s junior market in April and might be seen by some to have joined at exactly the wrong time. However, a raft of restaurant closures from the likes of Jamie’s Italian and Prezzo have paved the way for a small outfit to meet specific consumers’ tastes without going overboard. A 24% jump in adjusted earnings in its first set of full year results bodes well for the firm but with 25 lounges opened this year and 25 in the pipeline for 2020, there will need to be careful attention given to not becoming the next overexpanded casualty.

With the government’s plans to increase the pot of cash available to struggling high streets to £1bn, firms will be hoping to get the footfall rising. However, with too many shops and often in the wrong locations, many businesses will need to trim their offering if they are to compete in the lower-margin race come Christmas.

Among investors, selectivity in the space is now more important than ever. Papering over cracks by way of promotions and not learning from beleaguered stores like Debenhams will not cut it.

As we get closer to Black Friday and Cyber Monday, it might just become clear who will be left standing this time next year.

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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