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The Christmas trading period is important for retailers. For some, it can make or break their year.
There was a lot of apprehension ahead of Christmas 2022, both among investors and companies.
Most retail stocks, and stocks in other sectors exposed to consumer discretionary spending, fell out of favor with investors during the year as inflation soared.
And there were ominous noises coming from some businesses. Toys, games and gifts group Character said in October that he anticipated challenging conditions in the “very important Christmas trading period”, with a “Expected reduction in consumer spending…due to concerns about cost-of-living increases.”
Two weeks into January, we have already received a large number of business updates from retailers. How did it go and what are your prospects for 2023?
Ups and downs
Here’s how the market (stock price moves within the day) responded to updates issued by retailers in the first two weeks of the year:
- ASOS: +20.9%
- JD Sports Fashion: +7.0%
- NEXT: +6.9%
- Shoe zone: +5.4%
- Card factory: +5.0%
- DFS Furniture: +1.5%
- Marks and Spencer: +1.3%
- Tesco: +0.9%
- Retail of B&M European Voucher: +0.5%
- Topps Tiles: -0.6%
- Greggs: -1.0%
- N Brown: -1.1%
- JSainsbury: -1.6%
- Games workshop: -2.5%
- AO World: -5.4%
- Hornby: -15.5%
- Halfords: -18.7%
- United Kingdom virgin wines: -24.1%
online fights
Troubled online fashion retailer ASOS was quite the rise. However, this was due more to its new CEO’s turnaround plans than sales, which fell 6%.
Online retail was weaker overall, with Royal Mail disruptive strikes this year, compared with a boost to digital sales last year due to the Omicron coronavirus variant.
Virgin Wines, which issued a profit warning, was a big victim online, having also suffered major problems caused by a new warehouse management system.
Other fighters
The other two double-digit decliners also warned of gains. Hornby said his warning was as a result of the “challenging consumer economic climate”.
Halfords blamed the inability to hire enough qualified auto technicians, as well as expectations of “a deeper drop in demand for more high-priced discretionary items”.
Elsewhere in the high-end space, AO World shares fell on the day. DFS Furniture experienced a modest rebound, but cautioned that the fulfillment of the forecasts for the end of the fiscal year in June will depend on continued momentum in orders.
Notable winners
The updates from clothing retailers JD Sports Fashion, NEXT and Shoe Zone were very well received by the market.
High street benchmark Next raised its profit guidance for the year to £860m from £840m after strong sales performance.
However, his initial forecast for next year is that sales and profits will fall by 1.5% and 7.6%, although he admitted that “Some might think that this forecast is too cautious.”
cash and credit
For the most part, retailers had a decent Christmas. There may be a cost-of-living crisis, but it seems a lot of consumers are shelling out cash this holiday season.
At the same time, a BBC poll from early January showed that a third of respondents who used credit to get through Christmas said they were unsure of their ability to pay. And debt advice charity StepChange reported a rise in post-Christmas inquiries.
Outlook for 2023
It remains to be seen if consumers have had a final splurge and will now cut back on their discretionary spending. If so, we could see retailers’ profit forecasts downgraded as 2023 progresses.
On the other hand, if cost-of-living pressures were to start to ease, it could be a different story. And, for example, Next’s forecasts for the year could show “too cautious.”
Our objetive
As always, there are a variety of possible deviations from the market view of the economic outlook at the start of the year.
That’s why, here at The Motley Fool, we focus on the long term. We want to invest in companies not based on how we think their businesses and stock prices might perform in the next quarter, half, or year, but across multi-year economic cycles.
patience rewards
Retail stocks are currently depressed due to the prevailing market view of the near-term outlook for the economy. This suggests that there could be opportunities in the sector for long-term investors to buy today and reap big rewards for their patience in the future.
There are some great companies, with good management teams, strong business models and strong balance sheets. What rational investor wouldn’t want to own a piece of such a business when it can be bought at a knock-down price?
