Must read: Persimmon, M&S, ASOS, Halfords, Whitbread, Tesco

UK retailers are front-and-centre as European markets open higher, says our head of investment Victoria Scholar.

GLOBAL MARKETS 

The FTSE 100 has opened higher alongside broader European markets with Centrica (LSE:CNA), Whitbread (LSE:WTB) and Persimmon (LSE:PSN) trading at the top of the UK index thanks to positive updates from each company. However, Tesco (LSE:TSCO) is languishing near the bottom despite strong Christmas sales.

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Overnight, China’s consumer inflation rate increased to 1.8% in December, rising month-on-month but meeting expectations. Positive global market momentum lifted Asian markets overnight, following Wall Street’s positive close last night. However, US futures suggest markets could give back some of those gains at lunchtime as traders and investors await key US inflation figures due at lunchtime.

PERSIMMON

Persimmon completed 14,868 new home sales in 2022, towards the upper end of its guidance with the average private selling price increasing by 5% to £272,200, helping to lift shares towards the top of the FTSE 100. However, it warned about weakness facing the housing market and macroeconomic pressures which are weighing on demand. Persimmon also said it is ‘too early to predict when there will be a recovery in demand.’ 

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Both Barratt Developments (LSE:BDEV) yesterday and Persimmon today have flagged the slowdown in the housing market as a key headwind for the sector in 2023. Rising mortgage rates, a slowing housing market, build cost inflation, the fallout from the mini-budget and the end of the Help to Buy scheme have been major challenges lately. Many potential property buyers are holding off amid hopes that mortgages rates will settle, and the housing market will become more affordable down the line. 

Persimmon’s stock market valuation has almost halved over a one-year period, underperforming rivals Taylor Wimpey (LSE:TW.), Barratt Developments and Bellway (LSE:BWY). There is a rather pessimistic view on the stock from the analyst community with 12 hold or sell recommendations versus just six buys.

MARKS AND SPENCER  

Marks & Spencer (LSE:MKS) reported like-for-like Christmas food sales up 6.3% while clothing and home sales grew by 8.6%, topping expectations. International sales increased by 12.5% with a strong performance in the Middle East. In food, M&S achieved its highest ever market share while volumes through Ocado retail represented around 30% of the average basket on Ocado.com over Christmas. However, M&S warned that there are ‘clear macro-economic headwinds ahead and underlying cost pressures.’

Marks & Spencer achieved an impressive Golden Quarter with strong seasonal food sales such as of turkeys, in which it retained its leading market share for a third consecutive year. Meanwhile, menswear has been a key tailwind for sales at M&S partly thanks to its partnership with the England squad during the football World Cup. It has also been working hard to become an omnichannel retailer, achieving around half of its growth through third party brands, supported by its app as well as click and collect orders. After a difficult year for the shares, M&S has been picking up lately, rallying by more than 20% over the last month. But its commentary on the uncertain macroeconomic outlook appears to be weighing on shares today.

ASOS

ASOS (LSE:ASC) reported UK sales during the final four months of 2022 down by 8%, blaming weak consumer sentiment while overall revenue dropped by 3%. The online retailer outlined a cost savings and profit optimisation plan including around a 10% reduction in staff costs, which it says will have an impact of over £300 million in the full-year 2023. Investors are cheering these plans, sending shares higher by around 15% in today’s trade. 

ASOS fared extremely well during the pandemic thanks to the boom in online shopping after bricks-and-mortar stores were forced to close. However the post-pandemic reopening and economic normalisation has proved to be challenging. Plus it has been contending with cost-of-living pressures on the consumer, parcel delivery problems, cost inflation as well as issues with too much inventory. There is also extremely tough competition in online fast fashion with players like Boohoo Group (LSE:BOO), Pretty Little Thing and Nasty Gal, which are operating at a lower price point, attracting the younger fashionistas. 

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In December, ASOS lowered its executive bonus scheme criteria, highlighting the challenging outlook. There is also some uncertainty in the C-suite after interim CFO Katy Mecklenburg announced plans to quit in May. She has only been in the role since October when former CFO Matt Dunn stepped down. 

Even after today’s jump, shares in ASOS have still slumped by more than 70% over the last year and are down more than 90% over a five-year period, highlighting how ASOS still has a long way to go to restore investor confidence.

HALFORDS

Shares in Halfords (LSE:HFD) have plunged more than 20% after cutting its annual profit outlook. It is now guiding for full-year underlying profit before tax to come in at between £50-60 million, down from £65-75 million. It already issued profit warnings in June and November last year. 

During the pandemic Halfords’ profit jumped thanks to the cycling boom when Britons were looking for ways to avoid public transport. It was also allowed to remain open as a seller of essential goods when most shops were forced to close. However, the last year has been very challenging amid pressures from cost inflation and a weakening consumer. It has also been struggling to hire skilled staff for its auto centres. Having enjoyed a notable upswing between March 2020 and July 2021, since the highs the stock has mostly been under pressure and is down more than 50% over one year.

WHITBREAD

Premier Inn owner Whitbread (LSE:WTB) has delivered a 24% increase in total UK accommodation sales year-over-year, with sales compared to the pre-pandemic period up by more than a third (+37%).

Food and Beverage (F&B) sales rose 8% compared to last year, but remain 4% behind their pre-pandemic performance. Importantly, group-wide cost guidance for the current full year has been left unchanged, as have expected losses for its fledgling German business, while accompanying outlook comments point to strong trading momentum.   

In all, the uncertain economic outlook including a cost-of-living crisis still overhangs. Elevated costs such as those for wages and energy remain also obvious headwinds, while UK food and beverage sales have yet to recover to their pre-pandemic levels. More favourably, a recovery from the pandemic is at least underway. Initiatives to help return food and drink sales to pre-pandemic levels are being taken, while supply dynamics are expected to help keep pricing strong. 

On balance and given Whitbread’s budget hotel focus in tough economic times plus potential for further expansion in Germany, consensus analyst opinion currently points to a buy.