General retailer share prices have slumped since the Brexit vote – so why has the City moved so brutally to discount a UK recession?

The simple answer to this question is that’s what the stockmarket does – ie, one of its functions is to discount future events, and share prices in the general retail sector are telling us that the outlook for sales and profit margins is distinctly poor, in the light of the Brexit vote on June 23.

The share prices of the big-ticket, housing-market-related companies have been hit particularly hard over the past two weeks, as the City thinks, on the basis of historical precedents, that this area is where consumers will rein in their spending first.

Needless to say, there is not much evidence for this yet and mention must be made of poor old Topps Tiles, which reported yesterday that the last quarter’s trading was reassuringly strong (despite the recent impact of Euro 2016 on the attentions of many of its core customers) yet still saw its share price fall even further.

In much the same way, Dixons Carphone chief executive Seb James said that UK sales have been up since the Brexit vote, but his share price has still been savaged.

Weathering the storm?

Of course, in the very short term, there are all sorts of reasons why consumers can seem to be keeping on spending, with the weather often the driving factor, and the fact is that the recent cloudy and cool weather has been quite helpful to “indoor” retailers of homewares, furnishings and appliances etc (in contrast to the unhelpfully hot weather we enjoyed a year ago, which meant the comps for post-Brexit sales have been relatively soft for such retailers).

“Another weekly sales survey is that produced by the accountants BDO for small and medium-sized non-food retailers, and last week was not great… but this survey is nearly always gloomy, partly because it excludes online sales”

Nick Bubb

Thus, there was no sign of a Brexit slump at the great Retail bellwether John Lewis last week (w/e July 2), with gross sales up by 2.1% (broadly flat on a LFL basis), but trading was helped by the cool weather and the earlier start to Clearance this year, so we will have to wait to see an underlying trend emerge here.

Ironically, the weather shift against last year hurt John Lewis’s sister company Waitrose, which saw sales c5% down LFL last week, impacted by a tough comp (good picnic and barbecue business on the back of the sunny weather a year ago, plus the “Pick Your Own Offers” launch hype) and the cooler weather this year.

Another weekly sales survey is that produced by the accountants BDO for small and medium-sized non-food retailers, and last week (w/e July 3) was not great, with overall store LFL sales down by 1%, but this survey is nearly always gloomy, partly because it excludes online sales…

A murky picture

In much the same way, the various High Street footfall surveys have been negative post-Brexit, as Dave Forsey of Sports Direct pointed out today, but footfall figures have consistently been negative, partly because of online sales growth…so this doesn’t tell us much.

Talking of Sports Direct, however, moves the subject onto the impact of the post-Brexit slump in sterling on the dollar-based overseas sourcing of fashion retailers, because Sports Direct is the most exposed to this, having had to confess that it had no hedging in place for this sort of eventuality. If sterling stays at around $1.30, the impact on Sports Direct’s gross margins will be material, assuming it is unable to pass higher prices onto the consumer.

“It would have been helpful if Sports Direct had tried to quantify this downside risk to gross margins today with its final results, but for the time being it can hide under the ’too soon to tell’ mantra.”

Nick Bubb

It would have been helpful if Sports Direct had tried to quantify this downside risk to gross margins today with its final results, but for the time being it can hide under the “too soon to tell” mantra.

The definitive word on the subject of overseas sourcing margins and the impact of the weakness in sterling will doubtless come from Simon Wolfson of Next, in its Q2 trading update scheduled for August 3.

Around that time in early August, we will also get an early view of how “white van man” is reacting to the change in the climate, with the Travis Perkins interims on August 2 likely to provide an important barometer of this side of the trade.

Unfortunately, it is clear that the feeble UK economic recovery had been slowing anyway in recent months and, given the general shock to consumer confidence from the Brexit vote and the negative impact on the London jobs and housing market in particular, it is not surprising the City has moved so quickly to price in the risk of a recession and sustained sterling weakness.

  • Nick Bubb has been a leading retailing analyst for more than 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think Tank