The financial implications of shrinkage

Abstract

Overall performance of retail shares was bad during 1976. The list of sector leaders and laggards compiled at the beginning of January shows food and non food retailing well into the final half of the performance tables with falls of just over 10 per cent apiece. Although share prices have improved since the New Year in line with the market generally, stores, for instance showed a rise of just over 9 per cent, as against a market rise of over 11 per cent in the month running up to the middle of January. This lacklustre performance is hardly surprising in view of the fact that the trend in retail sales last year was flat or falling for most of the period. Earlier hopes of a growth in consumer spending during the autumn and winter were demolished by higher unemployment and the fall in sterling, which ate into disposable income through higher prices for some food and other imported goods. Profits, however, were a very different story, with margins, particularly in the food retailing sector, showing some very good improvement following the slowdown in wage increases and an easier position on the financing of stocks. But recovery here had already been discounted in a small rise in retail shares earlier on in the year, although this was evidently not maintained when it became apparent that the recession in the industry was deeper than first suspected. There is some evidence that retail sales are now showing some recovery. November's sales figures, for instance show a 17 per cent rise in value for that month over the same period of 1975 as against a rise of only 15 per cent for eleven months of the year overall. Food volume, in the wake of stiff price increases, is down by a percentage point, although the textile based sectors are apparently showing some improvement. But there is very little to encourage the view that a consumer boom is just round the corner, with unemployment continuing to increase, and what looks like yet another year of restricted wage increases. And retailing is not going to feature much in the sort of export led prosperity now being encouraged by the government. Apart from the now fabled presence of overseas shoppers in Oxford Street retailers are hindered, not helped by the fall in sterling. But obviously the consumers' pent up demand for goods will lead to a profits explosion if the economic climate turns warmer during the next few years. If there is going to be a bull market in shares based on oil prosperity in the 1980's retail shares will, as always be one of the sectors leading the market. They have been out of favour, with the occasional fillip for a good three years now, but still represent some solid value, not just in the relative stability of their earnings but in the large property base enjoyed by many of the famous High Street names.