Two big reasons to sell retail stocks now
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Associate Editor
David Stevenson Mar 26, 2009
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Yesterday we saw a rare ray of light from a British retailer. Supermarket giant J Sainsbury (LON:SBRY) saw its fastest quarterly sales growth in two years.
But investors shouldn't get too excited. Supermarkets sell things that people need, like food. Recent price rises will have helped here too.
On the high street, where most shops sell items that people can do without if they have to, it's very different. Trading's getting worse and costs are climbing. And the bigger picture looks no better - new fears over inflation are sabotaging the government's efforts to spend our way out of the crisis.
That's very bad news for economic recovery hopes. Retail shares have rallied by 15% in the last three weeks – which makes now a great time to sell...
Life for retailers is getting tougher by the day...
The rise in UK inflation (see How to protect your wealth from the global currency collapse for more), has been welcome at Sainsbury's supermarkets. Like-for-like second quarter sales grew 6.2%, the biggest increase since Q2 2007.
With higher food prices stoking up sales growth at Britain's grocers, "Sainsbury's has probably been a greater beneficiary from food inflation than most given its relatively high food exposure and relatively wealthy customers", says James Collins at Deutsche Bank. "It's also in a good position to benefit from consumer caution as customers trade down from eating out to eating in."
It must be enough to make to rest of the retail world weep. No price rises here – in fact the opposite, as stores have only survived by offering big discounts. And life's getting tougher by the day.
According to the Confederation of British Industry's (CBI) Distributive Trades Survey, 'reported sales' fell by much more than expected over the past month. That means the picture on the high street is as bad as it was before Christmas. Sure, maybe none of this is a huge surprise with unemployment rising and house prices continuing to fall. And today's official figures showed retail sales plunging a much worse than forecast 1.9% in February.
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... and the real carnage is now about to begin
But the real carnage could be about to begin. Because 25 March was one of the infamous 'quarter days' on which retailers' rent is due in advance for the next three months.
Anyone who's run a retail business that depends for much of its turnover on Christmas trade will know how painful the March quarter day can be. The opening months of the year can be dire, with the street outside the shop looking like the Mary Celeste, and yet you still have to pony up the dough to the landlord whether or not you've taken the money through the tills.
This year's been especially painful, with "a dismal Christmas for many retailers, and following the year's lowest spending months, this has meant the toughest quarter day since the early 1990s", says British Retail Consortium director general Stephen Robertson.
Some landlords have now agreed to retailers paying monthly rents on both new and existing leases. But that's likely to prove too late to save many severely hard-pressed tenants. The "large quarterly rental payment might be enough to push a lot more retail companies – where it's a significant cost – into insolvency", says corporate bankruptcy specialist Begbies Traynor. The company reckons that by February, it had identified 4,278 retailers "with significant problems" and 146 actual insolvencies. Since December, those numbers are up by 18% and 39% respectively.
As well as fading footfall, retailers have another big problem – the Government's cavalier approach to the pound. Sterling's weakness has forced up the price of imports, and thus the cost of sales "at the worst possible time", says Begbies Traynor's Nick Hood. "While the failure rate among major store chains may not reach the crisis levels of the festive season, we are still likely to see insolvencies of well-known retail chains in the high single-digits over the next three months".
And just when many retailers thought things couldn't get much worse, yesterday proved they can.
UK bond buyers went on strike – a gilt auction failed.
Why the bond buyers' strike is bad news for retailers
In other words, the government failed to borrow as much money as it needs to pay its own bills for the first time since 2002, when an auction of index-linked 30-year gilts failed. And it's the first time that an auction of conventional bonds has failed since 1995. Tim Price forecast this sort of problem on Tuesday: (Gilts - don't buy them) so I won't go over the same ground again. Other than to say that gilt investors were put off by Bank of England governor Mervyn King's admission that inflation may pick up faster than he'd expected.
That means that the British government will have no choice but to try to persuade investors to buy its bonds by offering higher returns. So gilt yields will be forced up, as will the long-term cost of borrowing.
Which will in turn kill all hopes of economic recovery stone dead.
General retail shares have bounced over 15% already within the last three weeks. In the light of what's in store for the sector, that makes now a good time to sell - if you haven't already done so, of course.
But Begbies Traynor (LSE:BEG) is a completely different kettle of fish. We recommended this stock last month as a company likely to do well in bad times (Seven companies that will prosper in the recession - if you're not already a subscriber to MoneyWeek, get your first three issues free here). Since then the shares have marked time. But from what we're likely to see over the coming months, Begbies looks like a stock to hold.
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