Christmas cheer, or Christmas fear?
13 November 2018
The run-up to the festive season should be a time of great joy for retailers, however, there seems to be little cheer on the high street so far. David Lewis of FIS explains more
Image: Shutterstock
Internet shopping and home delivery have long been playing the role of the Ghost of Christmas Future to bricks and mortar retailers, but, perhaps this year, they are the Ghost of Christmas Present. The run-up to the festive season should be a time of great joy for retailers, especially those at the upper end of the price range as people prepare to splash out on presents. However, there seems to be little cheer on the high street so far.
Arguably a flagship name, on UK streets at least, is the John Lewis Partnership, the operator of department stores and supermarkets under its Waitrose brand. A private partnership means there are no share prices to quote, but the previously resilient operator, where employees shared in the company’s profits, posted a 99 percent drop in half-year profits for 2018, which is as near to saying the firm made no money as it could be. With profits dropping from £95 million to just £1.2 million, John Lewis struggled to cope with upholding its “never knowingly undersold” maxim, forcing it to match lower cost competitors. The rush to the bottom with regard to pricing is affecting other brands too.
Marks & Spencer (M&S) is the other high street name, often used as a retail market bellwether, especially in the UK. In a market update today, M&S reported like for like sales down 2.2 percent, for the six months to September, with food sales down 2.9 percent and home sales sliding 1.1 percent. Revenues were down some 3.1 percent to £4.96 billion, but this disappointment was tempered by a 2 percent gain in pre-tax profits, rising to £223.5 million. Again, like John Lewis, much has been blamed on discounting, having “lowered its prices on hundreds of food items”.
Dropping prices cannot be a long-term solution to what is a long-term problem. With shop leases averaging 20 years, the retailer has its hands tied with regard to rushing into closing unprofitable stores, at least not cheaply. Getting clients back in through the doors and reversing the longer term downward trend in clothing sales, which is not affecting its previously slightly more resilient food division, will depend on bringing the M&S magic back.
Slashing prices is not the only issue affecting retailers. The higher price bracket shops are also feeling the pinch. Europe has been a poor performing market for overseas brands as well. Both Coty, the US cosmetics company, and Michael Kors, the US fashion apparel company, are blaming poor European sales performance dragging down the company’s overall performance. For Michael Kors, buying the famous shoe brand Jimmy Choo last year helped boost group revenues by 9 percent to $1.3 billion, but at a purchase cost of some $900 million. The Kors brand, which makes the bulk of the group’s profits, saw European sales slide 10 percent and profits slump 37 percent for the three months to September, compared to the same period last year. In contrast to M&S and John Lewis, Michael Kors blamed some of this failure on trying to move more upmarket and raise prices.
Coty, the cosmetics firm that owns brands such as Hugo Boss, Calvin Klein, Max Factor and Rimmel, blamed its “consumer beauty” segment (read: their lower-priced items) for its 9 percent drop in revenues, pushing it into a loss of $12.1 million for the last quarter, on sales of $2 billion. The shares dropped 20 percent on the news, completing a fall of some 50 percent over the last year.
Debenhams has not escaped either. The last five years have not been kind to the high-street department store, which has seen its shares fall from over £1 to just £0.08. Short sellers have long been targeting the high streets across the world, acting as the likes of Amazon chipped away at their sales, profiting from the inaction or inability of those stores to react to the threat surrounding them. Figure one shows the volume of shares borrowed, taken as a proxy for short interest, for the retailers covered above, indexed to 24 months ago, showing the dramatic rise in shorting activity as the companies faltered. Only Michael Kors appeared to have escaped the analysts’ slide rule, as volumes and utilisation remained very low.
Looking at the US market, J. C. Penney and Sears have long been in decline, ravaged by the likes of Amazon and other market disruptors. The last five years have seen both J. C. Penney’s and Sears’ shares fall 83 percent and 99.5 percent, respectively, as the bricks and mortar operators fail to react effectively to the internet stores. Sears shares have fallen from over $43 to just over $0.20, delivering significant pain to those holding long positions over the last five years.
Figure One shows a relatively flat trajectory for short interest over the last two years, compared with the others, but it should be noted that utilisation levels were already standing at 69 percent and 98 percent for J. C. Penney and Sears, respectively. Their story, perhaps as Ghosts of Christmas Past, should send a shiver down the spine of European stores this Christmas.
Arguably a flagship name, on UK streets at least, is the John Lewis Partnership, the operator of department stores and supermarkets under its Waitrose brand. A private partnership means there are no share prices to quote, but the previously resilient operator, where employees shared in the company’s profits, posted a 99 percent drop in half-year profits for 2018, which is as near to saying the firm made no money as it could be. With profits dropping from £95 million to just £1.2 million, John Lewis struggled to cope with upholding its “never knowingly undersold” maxim, forcing it to match lower cost competitors. The rush to the bottom with regard to pricing is affecting other brands too.
Marks & Spencer (M&S) is the other high street name, often used as a retail market bellwether, especially in the UK. In a market update today, M&S reported like for like sales down 2.2 percent, for the six months to September, with food sales down 2.9 percent and home sales sliding 1.1 percent. Revenues were down some 3.1 percent to £4.96 billion, but this disappointment was tempered by a 2 percent gain in pre-tax profits, rising to £223.5 million. Again, like John Lewis, much has been blamed on discounting, having “lowered its prices on hundreds of food items”.
Dropping prices cannot be a long-term solution to what is a long-term problem. With shop leases averaging 20 years, the retailer has its hands tied with regard to rushing into closing unprofitable stores, at least not cheaply. Getting clients back in through the doors and reversing the longer term downward trend in clothing sales, which is not affecting its previously slightly more resilient food division, will depend on bringing the M&S magic back.
Slashing prices is not the only issue affecting retailers. The higher price bracket shops are also feeling the pinch. Europe has been a poor performing market for overseas brands as well. Both Coty, the US cosmetics company, and Michael Kors, the US fashion apparel company, are blaming poor European sales performance dragging down the company’s overall performance. For Michael Kors, buying the famous shoe brand Jimmy Choo last year helped boost group revenues by 9 percent to $1.3 billion, but at a purchase cost of some $900 million. The Kors brand, which makes the bulk of the group’s profits, saw European sales slide 10 percent and profits slump 37 percent for the three months to September, compared to the same period last year. In contrast to M&S and John Lewis, Michael Kors blamed some of this failure on trying to move more upmarket and raise prices.
Coty, the cosmetics firm that owns brands such as Hugo Boss, Calvin Klein, Max Factor and Rimmel, blamed its “consumer beauty” segment (read: their lower-priced items) for its 9 percent drop in revenues, pushing it into a loss of $12.1 million for the last quarter, on sales of $2 billion. The shares dropped 20 percent on the news, completing a fall of some 50 percent over the last year.
Debenhams has not escaped either. The last five years have not been kind to the high-street department store, which has seen its shares fall from over £1 to just £0.08. Short sellers have long been targeting the high streets across the world, acting as the likes of Amazon chipped away at their sales, profiting from the inaction or inability of those stores to react to the threat surrounding them. Figure one shows the volume of shares borrowed, taken as a proxy for short interest, for the retailers covered above, indexed to 24 months ago, showing the dramatic rise in shorting activity as the companies faltered. Only Michael Kors appeared to have escaped the analysts’ slide rule, as volumes and utilisation remained very low.
Looking at the US market, J. C. Penney and Sears have long been in decline, ravaged by the likes of Amazon and other market disruptors. The last five years have seen both J. C. Penney’s and Sears’ shares fall 83 percent and 99.5 percent, respectively, as the bricks and mortar operators fail to react effectively to the internet stores. Sears shares have fallen from over $43 to just over $0.20, delivering significant pain to those holding long positions over the last five years.
Figure One shows a relatively flat trajectory for short interest over the last two years, compared with the others, but it should be noted that utilisation levels were already standing at 69 percent and 98 percent for J. C. Penney and Sears, respectively. Their story, perhaps as Ghosts of Christmas Past, should send a shiver down the spine of European stores this Christmas.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
