Last summer’s historic Brexit referendum continues to play havoc with retail conditions in the UK. Revenues on the high street and in cyberspace have cooled thanks to a lethal cocktail of galloping inflation; stagnating wages; and falling consumer confidence.
And the latest trading update from John Lewis earlier this week suggested that things could be about to get even worse. The department store giant saw pre-tax profits barrel 53% lower in the six months to July, to £26.6 million, as inflationary pressures and political uncertainty smacked shopper appetite.
John Lewis chairman Sir Charlie Mayfield certainly doesn't expect conditions to improve any time soon, and commented that "we expect the headwinds that have dampened consumer demand and put pressure on margins to continue into next year."
Ocado Group
The retailer’s spooky statement should come as particular worry for upmarket grocer Ocado Group. John Lewis also owns premium supermarket chain Waitrose, where operating profit declined 17.4% in February-July as it battled increased costs and endured sluggish sales expansion -- like-for-like revenues rose just 0.7% in the half year.
Allied to the pressures created by shrinking shopper spending power, Ocado could also struggle to keep sales on an upward slope as competition becomes fiercer in the British supermarket segment, with Amazon’s takeover of Whole Foods threatening to be as disruptive as the entry of Aldi and Lidl over the past decade.
Against this backcloth City analysts expect Ocado to endure a 40% earnings slump in the year to November 2017. And this results in a mega-high forward P/E ratio of 248.9 times.
The grocery giant is set to release third-quarter trading details on Tuesday, September 19th, and given the probability of another problematic update (rising costs and falling basket sizes saw half-year pre-tax profit dip 9.4% to £7.7m, Ocado advised back in July), I reckon now would be a sage time for investors to sell up.
Safestyle
The same pressures on consumer spending would also encourage me to switch out of Safestyle ahead of next week’s trading statement (currently slated for Thursday, September 21st).
Indeed, a series of market updates has already caused the window and door manufacturer’s share price to almost halve in less than four months.
In May Safestyle warned that it expected profits in January-June to retreat from the corresponding half in 2016 due to challenging market conditions, and followed this up in July by advising that full-year earnings may also fall short of prior expectations due to ‘volatile’ trading.
And Safestyle compounded investor misery earlier this month when it declared that ‘the group's order intake has declined beyond the board's expectations’ since the summer update, a situation which it put down to ‘an accelerating weakness in the market resulting from increasing consumer caution.’ With the company also incurring extra costs in an attempt to resuscitate orders, Safestyle said that it expected profits growth to prove elusive in the current fiscal period.
But given the steady deterioration in trading conditions, I believe this prediction could also be set to fall and possibly as soon as this coming week.
The Square Mile’s army of analysts expects earnings at Safestyle to slump 22% in 2017, resulting in a prospective P/E rating of 10.9 times. While this is cheap on paper, it is not cheap enough to encourage me for one to invest right now. I reckon investors should be prepared for more pain as further forecast cuts are quite likely in the near term and beyond.
