Commercial awareness: think like a professional about... British retailers' Christmas results

What do a banker, lawyer, accountant and consultant make of the holiday sales figures?

Some of the UK's largest supermarket chains and nationwide stores had better than expected results in the run-up to Christmas. Reported sales at Sainsbury's grew 2.1 per cent from those in 2010 in the three months leading up to the big day, while John Lewis saw a 6.2 per cent increase on 2010 figures for December, with its fashion and household goods offerings faring particularly well. In general, sales of food products rose strongly, as customers stocked up for special meals and parties, and treated themselves to luxury goodies that they might not buy at other times of the year.

Other big names were less successful during the period. Argos, Halfords, Mothercare, Tesco and Thorntons all reported fewer sales in the run-up to Christmas than for the equivalent period in 2010, with Tesco's figures dropping by 2.3 per cent. Even retailers who ended up doing well had to wait for revenue to come in, as many British consumers delayed much of their holiday spending until the week before Christmas.

The run-up to Christmas 2011 saw milder weather than that of December 2010, when heavy snow in many parts of the UK caused severe disruption to deliveries to stores and deterred many shoppers from venturing onto the high street. Commentators suggested that this fact may partly account for rises in transactions this year, and makes falls in sales causes for particular concern.

The retail industry is anticipating that sales will drop during January and February, as consumers tighten their belts now that the festive season is over.


  • Game off: It wasn't a merry Christmas for Game Group, the company behind the high street Game stores which sell video games, consoles and gaming accessories. The business has been in financial trouble throughout 2011 as consumers cut back on expensive entertainment products. The company issued several profit warnings over the past twelve months and has seen its stock drop in value by 95 per cent since the beginning of 2011. After poor sales in the run-up Christmas, a time of year when it might have expected to do well as people shop for gifts, the company announced that it was likely to break the EBITDA covenant (see useful terms below)in its loan agreements. An EBITDA covenant is a key clause in the legal documentation drafted by banking lawyers to establish a corporate loan, and is designed to allow banks lending to a business to closely monitor its performance by tracking this earnings-related figure. Breaking it is a big deal - and not in a good way.
  • Egg-cellent! Easter came early for a few lucky Tesco shoppers who got a cracking early January deal on those spring favourites from Cadbury, Mini Eggs. At stores across the UK, bags of the chocolate goodies were temporarily incorrectly priced at 1p - and on a 2 for 1 special offer to boot! In English law, if a retailer puts a product on offer at the wrong price, they're not obliged to honour that commitment, but Tesco allowed sales of Mini Eggs to go through as advertised until the glitch is fixed. With this kind of stock control, no wonder the groceries giant's in trouble...


  • Figuring it out: Some of those December figures might look pretty good, but let's take a closer look at whether they add up. For example, M&S reported a solid 2.8 per cent growth in sales from 2010 in the three months leading up to the end of year. But strip out the effect of opening new stores, and the increase is only 0.5 per cent. Over at Debenhams, sales were reported to rise 6.5 per cent from the 2010 Christmas period - if the January 2011 rise in VAT by 2.5 per cent is included. When it's disregarded, however, the department store's sales figures are about the same as those for the previous December.
  • Stocking up? The sales reports that many big corporates in the retail industry produce in January are not just filed by their accountants. They're also scrutinised carefully by investors as the run-up to Christmas is one of the most important periods in the retail year. The crucial rows of figures from these few weeks can have a very real effect on how the business is regarded by those holding the purse strings. And if, as is the case with most big retailers, the company is publicly listed, a fall in confidence can be revealed very quickly by a fall in the company's share price as some investors sell all or part of their holdings. This year, for instance, shares in Next and Tesco fell in value after disappointing Christmas sales figures.


  • Treats and tricks: There's been much crowing about a few surprisingly good retail sales figures for the Christmas period. However, it's important to remember that some of the tactics used to boost the number of transactions rung through the tills in December - like price-slashing, early starts to January promotions, longer opening hours, and generous returns policies (particularly useful for those buying gifts for hard-to-please relatives) - will often have been at the expense of stores' profit margins on the products sold. But then again, high Christmas sales figures may be worth these costs if they help to increase customer loyalty, and enable the business to put on a brave face to their investors with some nice-looking numbers.
  • Mastering it: Sometimes poor results mean that problems need to be ironed out, or a change in strategy is required - and that's where we consultants can help. We hear that some issues with a new IT system were behind online grocery store Ocado's pre-Christmas profit warning. Meanwhile, troubled music and entertainment store HMV, which has struggled as retailing in this area has increasingly moved online, announced plans to change its focus from CDs, DVDs and games to gadgets. Devising and implementing new IT systems and formulating new directions for faltering businesses are two of the things we like best, so both companies should give my firm a ring!


  • Net gain: One of the big winners in December was supermarket giant Asda, with a massive 10.7 per cent growth in sales from 2010 in the four weeks leading up to Christmas. The success of the grocer, now owned by US retail conglomerate Walmart, has been attributed to its takeover 18 months ago of Danish discount supermarket Netto. It just shows how a well thought-out M&A deal doesn't just make a company look good in the headlines, but can boost its success in solid financial terms over time.
  • Christmas jumpers: The retail industry, like other sectors, has had to grapple with dramatic fluctuations in commodity prices over the past year. A big slice of the cost to a retailer of putting a Christmas pudding, box of chocolates, or pair of reindeer socks on the shelves depends on the price at which wheat, cocoa, or cotton is trading on global commodity exchanges. But UK retailers, especially those in the food or clothing sectors, are often engaged in vicious price wars with their competitors so sometimes choose not to pass on increases in their own costs to shoppers directly. So peaks and plummets in commodity prices will have played a part in determining how large - or small - their December profit margins are. And a fall in some commodity prices, which I've heard market analysts are predicting for 2012, will certainly mean a happy new year for supermarket and department store balance sheets.