HMV, NEXT & the importance of consumer confidence

5th January 2011

The early signs from the high street are not good. First up was HMV, which announced that it was to close 60 stores across the UK after seeing a sharp fall in sales over Christmas.

But just as one swallow does not make a summer, the waning fortunes of HMV do not make a weak Christmas as Trilobyte points out: "It isn't a blip caused by a bit of bad weather. HMV has as much chance of surviving in their present form as a typewriter manufacturer did after the advent of the word processor and the PC."

This is a theme picked up by FT Alphaville.

More worrying are the results from Next, a business without the long-term structural growth problems of HMV. The group saw like-for-like sales fall 6.1% for the period between August and Christmas Eve, affected by extreme weather conditions and increased competitor discounting.

There are signs that other retailers are likely to report similarly weak results, as the weather upset their already precarious sales outlook .

But does that mean investors need to avoid everything related to the UK consumer? Trevor Green, UK equity fund manager at Henderson, thinks not. He says there are a lot of the Rumsfeld ‘known unknowns' about the high street and the recent difficulties could actually present opportunities. He says: "The stock market has already discounted a lot of bad news into share prices and expectations on current trading are low.

"Undoubtedly input cost increases,VAT increases and Government spending cuts are not going away in a hurry and will weigh on the sector next year but winners will still emerge. Just look at Mulberry Group whose share price is up over 400% in 2010. In the larger company space Carphone Warehouse is up 185% since demerger. So now is the time to start looking for ideas within the sector for next year rather than worry about what the Stock Market already knows."

The likely impact on the economy of this potential retail weakness is less clear. The UK consumer is a significant contributor to overall GDP and its weakness could not fail to be significant. To date, retail sales have held up surprisingly well in the economic downturn and the UK government is gambling that the VAT rise will not stop people spending. The early signs are not good, but cannot yet be said to constitute a trend. Investors will have to wait and see.

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