What's going on?
Unlike US department stores, it was a happy Christmas for major British retailers, as a swathe of reports this week showed sales in recent months were better than expected.
What does this mean?
Groceries and clothes have been two pretty dismal industries in the UK over the past few years, but things might be looking a little rosier now. Tesco, Britain’s biggest supermarket chain, said its sales growth picked up in the lead-up to Christmas and smaller rival Wm Morrison saw its strongest Christmas sales growth in more than seven years. Marks & Spencer, one of the worst performers in recent years due partly to its high exposure to the clothing business, experienced its first increase in sales of apparel in almost two years.
After a rough few years, things might finally be looking up for UK retailers. The UK economy performed remarkably well in the latter half of 2016 (despite the Brexit vote), and it appears that retailers reaped some of the upside (i.e. people spending more money).
Why should I care?
For the stocks: Investors are asking whether this is the beginning of a sustained recovery – or just a mini-rebound.
Tesco’s and Marks & Spencer’s stock prices are up 30% and 10%, respectively, since the summer, but they are still down substantially over the past three years. For UK retail companies to come anywhere close to recouping the losses their share prices have endured in recent years, they’ll have to show they can sustain their improved performance (which is far from certain).
The bigger picture: Don’t get too excited: the environment could be getting a whole lot tougher for UK retailers.
As the pound continues to drop in value, retailers’ costs will go up (as they import most of the products they sell). The retailers will either pass those cost increases onto customers via higher prices (which will likely lead to fewer goods being sold) and/or face declining profit margins – neither of which is good for profits.