High street left with harsh hangover

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In Christmas past, British retailers have enjoyed a festive bonanza in their stores as shoppers – emboldened by cheap credit and rising house prices – spent money without a care in the world.

But this year, shopkeepers have been forced to swallow a bitter cocktail of sluggish sales and painful price cuts as they grapple for cash to pay their rent bills and fund debt repayments in what is proving to be the high street’s bleakest winter in three decades.

A combination of falling consumer confidence and tightening credit conditions has left the sector in a tight spot. The panic discounts on offer across the high street – most at 50, 60 and 70 per cent off – will leave chains with a painful hangover next week when they start to release trading updates.

Analysts think that a toxic combination of poor sales and heavy discounting have slashed retailers’ profits. They expect more smaller chains to follow the likes of Woolworths, Zavvi and Whittard into adminstration over the coming weeks.

And while that remains an unlikely fate for any of the big, listed chains, analysts are sharpening their pencils for a round of hefty downgrades when reporting kicks off with Next, Debenhams and Marks and Spencer all releasing trading updates in the coming days.

Analysts are preparing for big downgrades on M&S, which showed its hand when it staged two guerilla sales days before Christmas on the back of weak trading.

Debenhams, still labouring with a huge debt burden from its days as a private equity-owned business, is also looking vulnerable and plans to raise equity capital in order to reduce its leverage.

Meanwhile, Home Retail Group, which owns Argos and Homebase, could also disappoint when it updates on January 15; the collapse of Woolworths, and its big-discount closing-down sale, forced the catalogue chain into hefty discounting ahead of Christmas on lucrative toy lines.

David Jeary, retail analyst at Investec, has already cut his forecast for the current year by 6 per cent to £310m, with 2009-10 moving 10 per cent lower to £225m.

“There will be a series of profit downgrades because the consensus is too high,” says Philip Dorgan, analyst an Panmure Gordon. “It doesn’t necessarily mean that share prices are too high, but there will be downgrades.”

And while retailers will not be giving details on how profits have fared when they give out their sales updates, anecdotal evidence points to a bloodbath.

All the staggering price cuts seen across the high street – with many retailers, such as Debenhams, HMV and Oasis, offering “up to 70 per cent off” sales – leave retail analysts in little doubt that some retail chains have been forced to sell goods for wafer thin profits, or even losses, in the search for cash.

“Some of these smaller clothing retailers are selling at a loss,” says Tony Shiret, analyst at Credit Suisse. “They need cash a lot more than they need stock.”

Experian, the retail consultancy and credit checking company, estimates that about 440 retail businesses will fail in the first four months of 2009, with the majority coming in the coming few weeks as the fall-out from a dire Christmas is felt among the smaller and weaker retail chains.

Jonathan de Mello, analyst at Experian, the retail consultant and credit checking company, thinks that the majority of those failures will come in the coming weeks or even days with the weight of the quarterly rent bills – due at the end of December – proving the death knell for the most stretched retailers.

“Paying the rent is one of the reasons for the discounting,” says Mr de Mello. “But they may also be looking to offload the stock to raise as much cash as possible to finance a pre-pack administration, in which the buyer will pay off the majority of debt while the retailer will look to rid itself of its Christmas stock.”

And for those who do survive Christmas 2008, there is likely to be little respite in the coming months.

As one veteran retail executive says: “The $64m question is what happens next. And you have got to be very nervous. The world is in a mess. Banks are still not lending and a lot of the fall-out from that is still to come. Everyone is very gloomy for consumer outlook.”

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