Clothing stores bore the brunt of shoppers’ reluctance to spend in August. The chairman of John Lewis has warned that the retail sector is in danger of talking itself into a slowdown over fears that interest rates will hit spending after it announced a 50.6% increase in half-year pre-tax profits. Next claims that higher interest rates will hit consumers at the peak of the Christmas season. French Connection has complained about “challenging” conditions and JJB Sports has cut its full-year profit forecast. Debenhams reported it was forced to discount heavily in the summer to clear stocks. Harvey Nichols saw profits rise last year. Poor summer weather left Homebase with million of pounds worth of unsold barbecues, deckchairs and garden furniture. Bauger has been forced to restructure the balance sheet of Mk One, the low-price fashion retailer. Virgin Megastores has been sold to Zavvi Entertainment Group.
In contrast to other US retailers, JC Penney issued an upbeat earnings statement. Wal-Mart and Macy’s both said that their profits had been hurt by the continued housing market gloom and high fuel prices. Because India’s retail sector is set to double in size by 2011, it is increasingly attractive to India’s bigger private sector companies and to Western businesses. Reliance plans to invest $7bn in 5,500 supermarkets and hypermarkets in the next few years to position itself as “the Wal-Mart of India”. Inditex is to launch its Zara high street brand in India. Japan’s Mitsukoshi is in merger talks with Isetan.
Clothing stores bore the brunt of shoppers’ reluctance to spend, according to the CBI. Retail sales rose at their weakest pace for nine months in August, as 15% more retailers reported rising volumes of sales than a fall, compared with a positive balance of 18% the previous month. The reported prices balance dropped to +16 from +33 three months ago and to +12 when retailers were asked what they expected prices to be in a month’s time. More moderate growth is expected to continue and retailers are less inclined to put up prices, says CBI chief economist, Ian McCafferty.
Charlie Mayfield, chairman of John Lewis, has warned that the retail sector is in danger of talking itself into a slowdown over fears that interest rates will hit spending. Mayfield said that despite caution over prospects in the run-up to Christmas, “The market is not in meltdown. … the underlying economy remains actually pretty strong.” He made his remarks as the retailer announced a 50.6% increase in half-year pre-tax profits. Sales by John Lewis Direct, the home delivery business, rose 42% in the first half. The retailer wants to double in size over the next decade, with the first of 12 new stores to open in Cambridge in November.
The John Lewis figures came only days after Next claimed that higher interest rates would hit consumers at the peak of the Christmas season and that like-for-like sales could fall by as much as 3.5% over the next five months after falling by 4.8% in the six weeks to 8 September. French Connection has also complained about “challenging” conditions and JJB Sports has cut its full-year profit forecast by 25%, sending its shares down.
Gloom about prospects for the retail market increased when Debenhams reported that it was forced to discount heavily in the summer to clear stocks. Underlying sales in the year to 1 September slid 5% and gross margins fell 0.9% percentage points in the six months to 1 September. Chief executive, Rob Templeman admitted: “There were one or two big trends that we had called wrongly,” but said that the retailer had improved the quality of its clothing by using better fabrics and detailing, and was holding prices. Nineteen stores, he added, would be refitted before Christmas; those that had already been revitalised were performing at least 5% better than core stores.
In contrast, and benefiting from strong demand for luxurious fashions and accessories, Harvey Nichols, the Knightsbridge department store, saw profits rise 47% last year. It also benefited from its expansion abroad – new stores were opened in Istanbul, Dubai and Hong Kong – and into the regions. Its rival, Selfridges, doubled annual trading profits in the year to 3 February. Sales increased 13% and trading profits went up from £10.1m to £26.8m.
Poor summer weather left Homebase with £30m worth of unsold barbecues, deckchairs and garden furniture. Largely as a result, like-for-like sales fell by 8% in the 13 weeks to September. The retailer will have to store three times more stock than normal over the winter before putting it on sale next year. Home Retail Group, which owns Homebase and Argos, says that Argos achieved a 1.4% rise in like-for-like sales over the 26 weeks to 1 September and pushed up gross profits margins by 125 basis points (1.25%) helped by cost savings. Homebase achieved a 300 basis points rise in gross margins.
Bauger, the Icelandic firm that owns a number of High Street names, has been forced to restructure the balance sheet of Mk One, the low-price fashion retailer with 172 stores, after it posted a £21.4m loss last year. Before a change of management, like-for-like sales fell 22% in the first five months of last year; they rose 1% in the remaining seven moths of the financial year that ended on 27 January. The retailer faces strong competition from Primark, which has been expanding rapidly, and from New Look, Peacocks and supermarkets, which are increasing their fashion ranges.
Virgin Megastores, the loss-making chain owned by Sir Richard Branson, has been sold to Zavvi Entertainment Group, a management buyout vehicle. The current management team will continue to operate its more than 130 stores in the UK and Ireland, although the British stores will be rebranded as Zavvi by November. In the past year, Virgin’s rivals Fopp and Music Zone have both called in the administrators, while HMV, the market leader, has issued a number of profit warnings.
Blockbuster has bought 59 Choices UK stores from the administrator, PricewaterhouseCoopers, and saved 450 jobs of 1,800 jobs affected. The company went bust in August with debts of about £13m after struggling to survive in a declining market for CDs and DVDs. The administrator has another 80 shops to dispose of after previously selling Choices UK online business. The shops have continued to trade while in administration.
In contrast to other US retailers, JC Penney, the department store aimed at middle-income shoppers, has issued an upbeat earnings statement. Second quarter earnings were $182m, up from $179m a year earlier. Internet sales and the back-to-school season helped in “a challenging retail environment”. Wal-Mart and Macy’s both said that their profits had been hurt by the continued housing market gloom and high fuel prices, which had tightened consumers’ budgets. Macy’s reported a 77% drop in second quarter profits as it was hit with the costs of recent acquisitions. Separately, Barneys, the iconic New York department store, has been sold to the Dubai royal family investment fund Istithmar for $942.3m after Fast Retailing of Japan pulled out of the bidding.
Because India’s retail sector is set to double in size by 2011, it is increasingly attractive to India’s bigger private sector companies, such as Reliance Industries, and to Western businesses. About 96% of the country’s 15m retail premises are small shops, often family run. According to the Economist Intelligence Unit, organised retailers, including Reliance, will have 20% of the market by 2011. In August, it opened a 165,000 sq ft hypermarket in Gujarat. Underpinned by annual retail sales growth of more than 7%, hundreds of shopping malls are set to open across India in the next three years.
Reliance plans to invest $7bn in 5,500 supermarkets and hypermarkets in the next few years to position itself as “the Wal-Mart of India”. Although the American giant has a foothold in India thanks to its joint venture with Bharti Enterprises – the new company plans to open a dozen or so cash-and-carry stores by 2015 – the country’s foreign direct investment rules do not make it easy for Western companies to enter the market. Foreign retailers selling more than one brand are banned from selling direct to consumers. While single brand retailers, such as Marks & Spencer, are allowed to take a 51% stake in Indian joint ventures, they have usually preferred to rely on franchise deals with Indian retailers. Along with M&S, Debenhams, Accessorize, Next, French Connection and Mothercare have opted to franchise their brands to Indian retailers, especially with Planet Retail, a venture part-owned by Future Group, owner of Pantaloon, India’s most successful clothes retailer.
Inditex, one of Europe’s largest clothes retailers, is to launch its Zara High Street brand in India. It is in discussions with several Indian companies, including Future Group, about forming a joint venture by the end of the year. If all goes to plan, Zara will follow fellow Spanish retailer, Mango, into India, which already has shops in Delhi, Bangalore and Mumbai.
In the face of a declining population and intensified competition, Japan’s department stores are consolidating. Fifth largest operator, Mitsukoshi, is in merger talks with Isetan, the fourth largest player. The combined group would have annual sales of $14bn that would rank it among the top ten worldwide.