The Top Line

January 11, 2013 7:52 pm

Christmas retail sparkle loses its shine

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From the frenzied scenes in London’s Oxford Street over Christmas and the New Year, it is difficult to believe that the UK is still struggling with an economic downturn, or that its retailers are suffering. And many of the numbers back this impression up.

Sales at Debenhams at stores open for at least a year were up nearly 3 per cent over the holiday period, while House of Fraser put in a record-breaking Christmas performance, with like-for-like sales up 6.3 per cent rise in the six weeks to January 5. John Lewis sold a stonking 13 per cent more goods over the festive season than it did a year ago.

Of course, the supermarkets – not to mention poor old M&S – had a tougher time, but the overall figures appear to tell the same positive story. According to the British Retail Consortium, spending was 1.5 per cent higher this December than it was in December 2011.

So is all rosy in retail? No, for the numbers come with some important caveats.

Companies’ Christmas and New Year season sales figures are unaudited and they have a lot of leeway when deciding which period to choose and which numbers to highlight – allowing them to cherrypick the ones most closely aligned to the story they want to tell investors. Even among themselves, companies disagree on the quality of their figures – Tesco and Sainsbury had an unseemly spat this week after the latter accused the former of inflating its cash sales by including voucher sales.

Secondly, a percentage movement in like-for-like sales is not a revelatory number. Shareholders should be more interested in how efficiently sales are generated and how much capital has been invested in achieving them. As Lex pointed out this week, only twice in the past five years has the chain with the best Christmas like-for-like sales gone on to record the best share price performance the following year.

As always, topline sales are no guide to bottom line profits. Although the only way to invest in John Lewis is to go and work there, its margins are a very respectable 6 per cent, and Debenhams’ are nearly 8 per cent. But House of Fraser’s latest operating margin was barely 3 per cent. Debenhams’ shares, meanwhile, are up more than two-thirds over the past year, but have fallen 8 per cent over the last (festive) month.

Finally, the composition of sales is worth digging into. Retail sales may have been up over Christmas, but they were driven by shoppers going online. The BRC numbers show that, without a 17.8 per cent rise in website sales for goods other than food, spending would have fallen. At John Lewis, meanwhile, online sales, which now account for a quarter of the chain’s business, were up 44 per cent year-on-year in the five weeks to December 29.

Surging online sales are not to be sniffed at, but here too the numbers are not robust. Clothing retailers, to take one example, have had to offer generous return and refund conditions to attract shoppers online. Retail watcher Richard Hyman of PatelMiller estimates that at least a third of clothes bought online are returned.

Retailers provide little information about their online sales versus those in store. If profit margins are lower, then investors should be unhappy that shoppers are moving more and more to the web. And how much investment it has cost to achieve these sales – both on the web and in bricks and mortar – is also opaque.

Just as an impulse buy at the sales rarely looks as good value in the cold light of day, retailers’ Christmas performance is not as good as it seems at first glance.

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