Retail shares square up to ‘Black Eye Friday’

<p>    Most retailers come back for more, despite a bruising in 2014 But Asda isn’t playing this year Will supermarkets be relative winners again? […]</p>



  • Most retailers come back for more, despite a bruising in 2014
  • But Asda isn’t playing this year
  • Will supermarkets be relative winners again?
  • Black Friday may have damaged the UK economy
  • That Dixons Black Magic
  • Another day with a silly name




Ready to rumble

The late November sales of US origin have quickly become notorious during their short history in the UK.

But their reputation for violence and injury—minor, usually—has recently been joined by a risk of sustained damage to retailers’ margins.

Despite this, consumer appetite for the promotion seems unstoppable.

Few retailers have decided not to join the fray this year, though some top retail executives have voiced misgivings.

After last Christmas, senior managers of chains like John Lewis, Britain’s biggest department store, and Argos-owner Home Retail Group, questioned the wisdom of concentrating so much business on Black Friday.

They suggested the event should be diluted.

However, a year later, they have either changed their minds, or lost the courage of their convictions.




Bigger, but not necessarily ‘blacker’ than ever

John Lewis Partnership Managing Director Andy Street said this month the group’s Black Friday events would “be bigger again this year”.

Most of John Lewis’s lower-price grocery rivals would probably be as bullish.

Among big supermarkets, only Asda, which was recently overtaken by Sainsbury’s as the second-largest grocer in the UK, will not be participating in Black Friday 2015.

The Wal-Mart-owned group argues its customers don’t like big price fluctuations.

“This year customers have told us loud and clear that they don’t want to be held hostage to a day or two of sales”, said Asda’s CEO, earlier this month.

Perhaps those customers recalled the infamous scenes of pandemonium at Asda’s last Black Friday shown by the media, epitomising what many regard as the senselessness of the event.

Asda, which in many ways is currently the worst-performing big UK supermarket group, believes it will have the last laugh.

Black Friday “might drive some of the ones in (the) red into even deeper red,” said Asda’s finance director Alex Russo.

Unfortunately, for UK retailers, he may have a point.




Asda abstains

One of Asda’s reasons for not re-joining the Black Friday frenzy may partly be down to a wish to avoid a repeat of the brawls that broke out at a minority of its stores last year.

However, another is undoubtedly that the business case for such promotions in the UK, so near Christmas is questionable.

It looks like British retailers have yet to fine-tune their formulas enough to see the traditional benefit US counterparts reap from the sales, and which gave the promotion its name.

Instead of the day on which UK retailers jumped from losses on the year into the black, many found their selling cycles were disrupted.

Facing a drop in demand in the weeks that followed the event, many store groups have had little option but to sell stock at a discount for longer.

Additionally, retailers say anticipation of Black Friday sales has begun to distort trading activity far in advance.

In such cases, footfall tends to slip, according to the retailers, and operating profit may take a while to heal from the battering margins take on the day.

All this has hit profit margins.

Asda’s solution to the conundrum is to invest over £26m in sustained discounts spread across the traditional winter shopping season, rather than focusing on one day.

Will rivals regret not following its lead?

The list of serious corporate casualties from Black Friday 2014 is a long one, it includes the retailers named below and many others:



  • Shares of Argos operator Home Retail Group entered a downtrend in January from which they have yet to emerge. Its sales catapulted 45% higher than average on Black Friday 2014, and online visits tripled year-on-year, but margins were trashed
  • Shares of Game Digital imploded by 56% on one day in the same month, the worst share price fall by a retailer in reaction to a 2014 Christmas update. It said heavy competition pressured it into unprecedented price cuts and bundling games with consoles—again, margins were slammed
  • Marks & Spencer, the biggest UK clothing retailer, was last year’s highest profile ‘casualty’. Its huge distribution centre in central England was thrown into chaos and was a major factor in the firm missing forecasts. M&S says it has tested its systems and they won’t fail again
  • Sales of Boohoo.comDebenhams, Majestic Wines and other large retailers also disappointed, although less severely. But because of the Black Friday link, their shares still fell sharply on the day of their updates






This won’t be happening again – Black Friday at an Asda store, November 2014





A better day in a bad year for supermarkets

The largest UK supermarkets ironically were among last year’s Black Friday ‘winners’. None of them reported stronger same-store revenues during the quarter holding the promotional season; though 2014 was an overall annus horribilis for the industry.

But because sales falls in their quarters including Black Friday were not as deep as expected, their shares rose.

  • For instance Tesco said same-store sales fell 2.9% in the 19 weeks to 3rd January 2015, above expectations and much better than the 5.4% sales fall seen in Q2, its shares rose 15% on the news, its biggest one-day rise since 2008
  • Another winner, was at the time embattled ‘twenty something’ fashion chain SuperGroup Plc. It said same-store sales in the 11 weeks to 10th January grew 12.4%
  • Perhaps the biggest ‘winner’ in 2014 November sales was Dixons Carphone. It said gross margins during the 2014 Christmas season were steady, but it did not escape the retail perils of the season entirely. “There is no doubt that the huge scale…of our Black Friday promotion impacted the three weeks that followed”, said DC’s CEO Sebastian James in January




Discount, deflate

Most of the biggest retailers had little to crow about, though.

Sales during the 12-weeks ending on 4th January showed the fastest growth seen since August 2014, said retail market research firm Kantar Worldpanel.

Sales rose 0.6% compared with the same period during the year before.

However, Kantar also noted pressure on prices intensified, with like-for-like deflation of 0.9% during the 12 weeks, another new record low.

A large part of the deflation was due to “high levels of promotion”, said Kantar, attributing 43% of consumer grocery spending at the time alone to ‘deals’ of some kind.

The entire UK retail sales complex continued to deflate in December, according to The British Retail Consortium’s monthly retail sales figures.

Sales fell 0.4% in December year-on-year on a like-for-like basis.

Economists polled by Thomson Reuters had on average forecast sales would actually rise during the month by 0.7%.

This raises a major question for Black Friday 2015.

Will investors be as tolerant of the big supermarkets and other recovering retailers if their November 2015 profits disappoint again?

After all, this time, there are few tough comparable performances from the year before to judge them against.




UK retailers carry on discounting

Most major UK retailers seem to have ignored the risk to their shares, perhaps hoping that tweaked strategies will bring better results this year.

But whilst virtually all retailers claim to have taken steps to avoid the problems that beset last year’s November sales, decreased discounting does not seem to be one of them, in most cases.

Already, the Black Friday hype machine is running at full strength, and there’s some justification.

  • Retail researcher Conlumino forecasts Black Friday 2015 will generate UK sales—in store and online—of £1.6bn, up 20% on 2014
  • Online spending is forecast to soar 32% year-on-year to £1.1bn, according to Experian-IMRG

Given that most retailers are not planning to make major changes to their in-store Black Friday strategies in 2015 (apart from doubling down), year-round sales will play a big part in how investors judge their winter season.


Unfortunately, some retailers have taken a Black Friday hit in advance of the event itself.

  • The British Retail Consortium blamed weak October numbers on shoppers holding out for bargains
  • Last month, Home Retail issued a profit warning. It blamed uncertainty ahead of Black Friday, despite introducing “red”, “white” and “blue” Friday deals at Argos ahead of 27th November, hoping to smooth demand
  • Last week Poundland also blamed “volatile” conditions in the run up to 27th November for like-for-like sales falling 2.8%, the worst performance by any large retailer in the quarter





Dixons’ Black Magic

We expect the pair above to have company after this year’s event.

Firms, which are already facing significant challenges so far this year, whether due to shaky sales or weak margins,  can be expected to go over the edge, at least a little, if they get Black Friday wrong again.

On the other hand, those retailers which get the formula right, may not necessarily see much profit from Black Friday, but their shares are still likely to get a boost, if last year’s January updates are anything to go by.

Either way, retailers still face considerable hurdles this winter.

For example, even though Dixons Carphone navigated Black Friday without much damage last year, and has performed well in 2015, its modest operating margin could leave it exposed to some negative impact this winter.

Still, Dixons may have a winning formula. It typically plans late November promotions meticulously, and buys products specifically manufactured for Black Friday deals.

This protects margins.




Blue Monday?

Another way Dixons and many other large retailers hope to beat the Black Friday curse, is by beefing up online promotions, including extending discounts into Cyber Monday.

If this results in a broader retail mix for the promo season, sales volatility (and perhaps instances of human volatility) might be reduced on the big day.

Retailers who sell predominantly or only online might have something of an advantage if more customers decide to switch winter shopping to the Internet.

‘White goods’ and consumer electronics retailer AO World could be a case in point.

“We’ve renamed it ‘Black Eye’ Friday, AO CEO John Roberts said this week. “Online is the safest place to bag a bargain.”

However, AO’s shares fell sharply earlier this week after it reported a £9m operating loss for the first half of its financial year.

AO World’s sales are ballooning from a very low base, as it invests to expand in Europe, with little-to-no profits forecast for the next few years.



Below we list the retailers whose performance we will track particularly closely on Black Friday 2015.

We’ve ranked them based on sales growth and operating margins.

We believe these metrics could be major deciders of which retailers will win, and which will lose.





Please click image to enlarge / data from Thomson Reuters, Thomson Reuters SmartEstimate







Please click image to enlarge / data from Thomson Reuters



This article will be updated on Friday 27th November


Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.