Christmas retail round-up – how did retailers fare?

It’s no secret that Currys has had it hard lately. Over the peak Christmas trading period, like-for-like revenue fell 3%, declining across all regions. Consumers are struggling to justify spending on TVs, computers, and gadgets in a cost-of-living crisis.

This is pushing a record number of consumers towards Currys’ credit offering, which lets consumers spread out payments for big-ticket items into more manageable chunks.

Credit brings an extra profit stream for Currys, while also opening the door to sales that would usually be out of reach for many customers.

The group’s second-largest region, the Nordic countries, is still showing signs of struggle as customers stay very selective about their spending. A recovery here will be key to any potential shift in market sentiment and profitability.

But it’s not all doom and gloom, Currys’ services channels have been a beacon of light. Services like Credit, Care & Repair and its iD mobile network are all typically higher margin than standard goods sales. So they could help ease some of the pressure from the group’s falling revenue.

Because of this strong services growth, full-year pre-tax profits look set to land in the £105-115mn range, ahead of market expectations. But this is still around £9mn down on the prior year.

The sale of its Greek business will bring in a good chunk of cash which will strengthen the balance sheet by paying down debt levels. There could be some leftover funds to return to shareholders, but this isn’t guaranteed.

And given the group’s struggling performance and negative free cash flows, we caution against any expectation of continuous dividends over the medium term.

All in, we think consumer electronics will stay a challenging corner of retail as spending power remains under pressure, leaving scope for further disappointments. A lot hinges on a recovery in the Nordics, and until that happens, group performance is likely to be underwhelming.

Next’s Christmas trading update gave investors plenty to be jolly about. Full-price sales were well ahead of group expectations, leading to another profit upgrade for its 2024 financial year.

Keeping full-price sales front and centre to avoid discounts is one of the reasons Next has some of the best margins in the sector. Over the last five years, Next’s November-December full-price sales are up more than 40%, while items heading onto the sale rack are only up around 15%.

The Online division is still the main growth driver, with online sales rising at near double-digit rates over the festive period.

The online focus has helped Next grow its overseas presence too, with sales and margins both heading in the right direction. It’s still a relatively small slice of the pie, but overseas markets offer huge growth potential.

It’s important not to get too carried away though. Even though the economic headwinds might be showing signs of easing, it’s still tough out there and consumers’ budgets are staying tight.

There’s also the potential for Next’s improving online sales to take some of the shine off its in-store sales, although both have been strong in recent years.

The balance sheet looks in good shape, with debt levels trending in the right direction. £525mn worth of dividends and share buybacks are planned for the upcoming 2024/25 financial year, equal to about 5% of the company’s current value. Market forecasts suggest these are covered by cashflows, but no shareholder returns are guaranteed.

Next has navigated the challenging backdrop well so far and looks well-placed to prosper when the outlook brightens. The valuation is in line with the long-term average, but we see scope for more upside if it can execute well on its overseas expansion. Although, nothing is guaranteed.

As the supermarket battle for customers was heating up, Tesco enjoyed its best-ever Christmas. Retail sales were up 6.0% in the six weeks to 6 January, as Tesco wrestled market share away from its competitors.

Tesco’s enormous scale and deep-rooted relationships with its suppliers have been key tools in keeping prices down. The group cut the cost of nearly 2,700 items in the run-up to Christmas, relieving some of the ongoing pressures on incomes, especially for low earners.

The Tesco Finest range has also expanded, helping poach customers from more premium supermarkets. And those who already shop at Tesco treated themselves at home, instead of going out, boosting Finest sales by around 17%. We see both these shifts as potentially long-term in nature, meaning there’s more juice to be squeezed.

The roughly £2.0bn of retail free cash flow due to pump around the business this year helps underpin the attractive 4.3% prospective dividend yield too. Although, no dividend is ever guaranteed.

But for all the positives, there are challenges to keep in mind.

While low-cost supermarkets like Aldi and Lidl might not be an existential threat, they are nabbing shoppers from the bigger names. This is putting pressure on Tesco to keep offering great value at the right prices, which is a big task and also squeezes margins.

Ultimately, this trading performance was better than expected and led to a boost in full-year guidance. Retail underlying operating profit now looks set to come in at around £2.75bn, above the previous £2.6-2.7bn guidance range.

We don’t see the current valuation of 11.6 times next year’s earnings as demanding. The group’s reliable revenue streams, market-leading proposition and income potential shouldn’t be overlooked. However, grocery competition is fierce which leaves little room for margin growth in the near term.