MW_ArticlePageView
Retailers struggle to survive
By
Euan Stuart
Dec 12, 2005
A few weeks ago, a friend of ours bought a sofa. The furniture firm was thrilled. So thrilled that as a reward for handing over her cash, they gave her an armchair and a stool to go with it for free. This has to tell us something about the state of the market, she told us: either the sofa was grossly overpriced in the first place, or the shop was desperate to get stuff out of the door. So which is it? Those who don’t know need only turn to the business pages of pretty much any paper on any day. It’s desperation: most furniture retailers are struggling for survival.
Courts, Allders and The Sofa Company have all disappeared in the last year and, as Susie Mesure points out in The Independent, the retail recession has just claimed another high-profile victim. The Furnitureland chain, which has been operating in the UK since 1973, was forced to call in administrators last week after losing £4m and six of its directors in 2004. At the moment, according to ICC Credit (a credit referencing agency), 5% of the UK’s domestic furniture retailers are in liquidation and 9% of the firms in the sector have a County Court Judgement filed against them. Even the giants of the sector appear to be in trouble. MFI – the UK’s number one furniture business – released a miserable trading update earlier in the month showing that in the UK orders have declined by 15% since the start of the second half of the year, thanks, say analysts at Goldman Sachs, to an “extremely weak” market and the fact that customers appear to be trading down to cheaper kitchens. So what’s stopped the UK consumer from spending? It would be nice to think everyone now has a sofa they’re happy with, but the truth is less upbeat: it’s all about the housing market.
Fewer transactions (house sales have fallen dramatically over the last year) mean fewer people need more furniture, and at the same time the fact that house prices are no longer rising has hit consumer confidence hard. If we know we will no longer be bailed out of our debts by the rising value of our homes, we spend less, and that is exactly what we are doing. In the six months to the end of August last year, people borrowed £1.1bn a month via loans, overdrafts and credit cards – but over the same time period this year that has fallen to a mere £520m. Britons are also saving more than they have for many years: in the three months to June, they borrowed just 27p for every £1 they saved, according to IFA Promotion.
But there’s another problem for furniture retailers: just as consumers are going on strike, competition is hotting up. Next, Argos and Homebase have all joined the furniture fray. Worse, there is a new breed of furniture warehouse about, says Alison Cork in The Observer. Using the stock from firms that need to offload quickly, out-of-town warehouses have sprung up, “quietly selling off” ends of lines, oversupply, liquidation stock and returned stock from the likes of Habitat at discounts of up to 70%. This is good for consumers, but a nightmare for already struggling mainstream retailers.
This isn’t just about furniture retailers, but all retailers. According to the latest CBI Quarterly Survey, for the first time in seven years more retailers are despondent about the future than are hopeful, says the FT. In fact, things are so bad that the underlying annual sales trend – a three-month moving average that factors out short-term changes – was the weakest in the 22-year history of the survey. Things will get worse before they get better.
What you should do with your retailer shares
It has been no secret over the last few months that the retail sector is hitting trouble, and we’ve written about it in MoneyWeek many times. However, that does not mean that all the bad news is in the prices yet. For example, due to bid speculation, MFI shares are no lower than they were when the firm said trading had collapsed over the summer, says Stephen Foley in The Independent. But that bid “simply isn’t going to happen”.
According to Richard Ratner, the veteran retail analyst at Seymour Pierce, the group’s debts and pension fund deficit of £300m has to be subtracted from the value of its fast-growing and profitable joinery chain, Howden, meaning that the company is not worth nearly as much as many think. And Kingfisher, once touted as a buyer for Howden, has too many of its own problems to bid now.
As for the rest of the sector, what makes anyone think things will improve any time soon? House prices will at best stay flat, which won’t help, and at worst they will fall substantially, which certainly won’t help. The evidence suggests that the credit-fuelled spending boom of the last few years is over and that, says Tim Price of Ansbacher Wealth, means that pretty much every retailer in the UK (with the possible exception of Tesco), is a sell. Analysts say you should buy when there is blood on the street, but what if the blood has only just started flowing?
Published in Investment-Advice
| More
articles
by
Euan Stuart
MW_RelatedArticlesFooter
Related articles
-
Jul 18, 2008
-
By David Stevenson, Jul 04, 2008
-
By Eoin Gleeson, Jun 27, 2008
MW_MoneyMorningSubscribeFooter.ascx
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Deputy Editor, John Stepek, and guest contributors.
Sign up, FREE, to Money Morning here.
