Big retailers Brexited

Associated British Foods’ tailwind from the collapsing pound was the best news the retail sector could offer on Thursday.

Overall though, a raft of updates did little to remove investor worries.

What’s shaping up to be the first sales annual sales drop for 15 years at ABF’s Primark, was only forgiven after the group lifted guidance. Earnings per share would now at least match last year’s 102 pence—instead of fall as previously stated—after a recent reversal of fortunes at Primark and ABF food divisions accelerated.

UK-focused Primark, already softened by more hesitant shoppers this year, is now exposed to sterling’s worst rates against the dollar for over 30 years. But the AB Foods business should benefit. The cut-price retailer buys in dollars and sells in pounds whilst the food side sells in euros with costs in sterling.

The expected cushion at ABF allows Primark to push ahead with its high-volume-low-profit strategy. It expects to open more stores on top of the additional 11 launched in Q3.

Still, given Primark’s 60% contribution to operating profits, a long-lasting sterling slump will only be offset by an implausibly herculean effort by ABF.

If thinning margins translate to a fallow period for the shares—despite Thursday’s 9% rise—investors may opt for ABF’s sugary rival Tate & Lyle, or more diverse Unilever.

Both offer higher dividends.

For Marks & Spencer which also released sales figures, its official stance remains that “it is too early to quantify the implications of Brexit”. But it also acknowledged that “consumer confidence weakened in the run up to the EU referendum”.

At worst, that suggests Marks could see continuing weak throughput from before 23rd June and in the aftermath.

The added weight on persistently soft Clothing & Home would have obvious effects. Sales at established stores in the division verged on a 10% fall last quarter, the worst since 2005.

Unfortunately, M&S’s claim to have “strongly outperformed the food market” during the 13 weeks to 2nd July, also rang hollow. After years of sector-beating like-for-like (LFL) food sales growth, LFLs were down 0.9% in Q1. That’s in line with the meagre performance by the best of the big grocers, Sainsbury’s, where LFLs fell 0.8%.

Marks put 0.5% of food sales weakness down to Easter being too early. Other retailers benefited because the holiday fell in their quarter. The underlying picture will be clearer when M&S reports its current quarter. In the meantime, it’s still too early to warm up to M&S, even after its shares have fallen 33% this year, matching the tumble by the FTSE 350 General Retailers index.

Sports Direct’s full-year earnings confirmed that it too continues to battle on old fronts.

The shares surged 16% higher early on Thursday, but closed just two pence up. That was after investors factored in lower profits following higher wages. Pre-tax profit was slashed 8%, much more than expected.

The share buyback the group is considering will flatter the stock price if enacted. But despite Sports Direct’s upending of retail conventions, Mike Ashley’s best-known brand is a classic British retailer in one respect: significant exposure to the pound. That exposure cost it £2.3m in fiscal 2016 (less than 2015) and will be higher in the current year if sterling doesn’t bounce hard.  A 10% sterling drop versus euro would hit Sports Direct’s hedging contracts for £65m, it said.

The controversial group was also franker than M&S about the “drag on consumer confidence” from Brexit.

The possible crush on Sports Direct’s modest margins will keep the shares capped at four-year lows for now.

And whilst the biggest shorts have moved on since bearish trades peaked last summer, the lack of dividend could lure them back.

At least Sports Direct shares can no longer be described as overpriced after falling 70% since April 2014, whilst M&S trades at a slight discount to its sector at 12 times. ABF’s 29x premium may soon attract the wrong kind of attention.