Shares in consumer-facing companies are falling in both the UK and the US
Thursday 12 May 2022 Author: James Crux

The market is increasingly concerned about the outlook for Marks & Spencer (MKS) ahead of the retail bellwether’s full year results on 25 May, judging by a 42% year-to-date share price decline.

Investors should prepare themselves for potential news of disappointing recent sales and a downbeat outlook statement.



There is clear evidence of faltering UK consumer confidence with Boohoo (BOO:AIM), Joules (JOUL:AIM) and Seraphine (BUMP) all recently coughing up fresh profit warnings.

Next (NXT) served up a solid first quarter update on 5 May and reiterated full year sales and profit guidance. However, the impact of its planned price increases to mitigate cost inflation is yet to be seen, with hard-pressed shoppers grappling with soaring energy and other bills.

Interest rates are rising, and the Bank of England expects inflation to peak as high as 10% later this year, before falling back below 2% in two years’ time. There is also growing chatter about a potential house price crash in the UK if consumer finances are squeezed further and the economy stutters.

These factors are crushing consumer confidence and shoppers are already cutting back on non-discretionary purchases including clothing and big-ticket homewares.

BLEAK RETAIL SALES FIGURES

The BRC-KPMG Retail Sales Monitor for April 2022 confirmed on 10 May that shoppers were low on confidence, with total sales in April down by 0.3% year-on-year, with the rising cost of living putting the brakes on consumer spending. Sales growth has been slowing since January, though the real extent of this decline has been masked by rising inflation.

Crumbling consumer confidence has negative implications for Marks & Spencer, which could see last year’s encouraging progress behind a clothing and home business with an improved range and value proposition halted as shoppers pull in their horns.

Another risk is Marks & Spencer’s ever-reliable food business could begin to suffer as shoppers watch their pennies and trade down to cheaper rivals, among them German discounters Aldi and Lidl which collectively account for 15.4% of the UK grocery market according to the latest figures from Kantar, up from just 5.5% a decade ago.

Investors will also be worried about the outlook for Marks & Spencer’s online business given a negative read-across from earnings alerts across the sector. For example, online fast fashion retailer Boohoo saw its latest full-year pre-tax profit decline from £124.7 million to just £7.8 million as distribution costs rose and the level of customer returns increased.

Boohoo warned to expect no revenue growth in the first half of the current financial year and low single-digit growth for the year, with its customers under financial pressure.

Premium British lifestyle group Joules warned market conditions have become more challenging and flagged a hit to margins from increased promotions and reduced demand for full-priced goods.

Shares in maternity brand Seraphine slumped after it cut guidance for 2022 and 2023 due to cost inflation and weakening consumer sentiment across Europe pinned on the cost-of-living crisis and Russia’s invasion of Ukraine. 

Shares said to buy Marks & Spencer at 178.5p last September and the price had advanced to 256p by January. It has since fallen to 134.9p. Given a lot of potential bad news has now been priced in, wait for the results to see how the business is coping before deciding whether to sell now or sit tight for a recovery.

CARNAGE ACROSS THE POND

Retailers’ share prices have also cratered across the pond, where the US Federal Reserve is hiking rates to tame inflation.



Shares in major e-commerce companies have sold off heavily amid slowing growth as consumer shopping habits return to pre-pandemic normality and inflation cools spending. They include online shopping giant Amazon (AMZN:NASDAQ), off 36% year-to-date. 

Weak guidance has weighed on web-based auction and shopping platform Ebay (EBAY:NASDAQ) and arts and crafts website Etsy (ETSY:NASDAQ), while online peers Wayfair (W:NYSE) and Shopify (SHOP:NYSE) are also down heavily year-to-date.

All eyes are now on upcoming earnings from major US retailers for a read on the strength of the US consumer. Walmart (WMT:NYSE), the world’s biggest retailer, and home improvement giant Home Depot (HD:NYSE), will update the market on 17 May. Target (TGT:NYSE), and Lowe’s (LOW:NYSE) report earnings on 18 May, followed by Foot Locker (FL:NYSE) on 20 May.

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