Turnover is vanity, profit is sanity
The business news that matters
Hello and welcome to the latest edition of Off to Lunch…
The largest retailers in the UK are revealing how they performed during the vital trading period in the run-to Christmas.
There is much you can’t tell from these January trading updates from publicly-listed retailers. For example, they focus on sales, rather than profits. This means you can’t necessarily see if a retailer boosted sales by cutting their prices. That won‘t be clear until they publish detailed financial results later in the year, which will show the profit margin they made on sales. As the old saying in retail goes, “turnover is vanity, profit is sanity” - so those companies celebrating a rise in sales might not actually turn out to be the Christmas winners.
Retailers also use different interpretations of “like-for-like sales” in their trading updates, making them difficult to compare. Like-for-like sales has become widely used as a measure of how a retailer has performed year-on-year. It is meant to show a retailer’s underlying performance and strip out the impact of any new shops or expansion. But it is not standardised as a financial metric. This means that retailers often measure the impact of certain factors differently - such as extensions to existing shops, gift vouchers, and online sales.
Furthermore, with inflation running at around 10 per cent for much of 2023, it is worth remembering that an 8 per cent or 9 per cent rise in like-for-like sales might actually mean a retailer sold fewer products year-on-year - that rise in sales could just be from a rise in prices. And with online fashion retailers often reporting that more than a third of purchases are returned to them, unwanted purchases made in December are still making their way back to businesses.
Nonetheless, these trading updates still offer a fascinating insight into consumer habits. Take the updates that have been published today. Shares in Watches of Switzerland are down more than 30 per cent after the company, whose jewellery brands include Goldsmiths and Mappin & Webb, said annual profits would be lower than expected due to difficult trading. The company said that “challenging macro-economic conditions impacted consumer spending in the luxury retail sector” and that in the UK there has been “unusually high level of promotional activity in non-branded jewellery”. You can read the trading update in full here
Meanwhile, Pepco, the owner of Poundland, said its like-for-like sales in the UK were up 0.9 per cent and that gross margins for the group (which also runs Dealz shops across Europe) had risen by 200 basis points. However, Pepco also warned that it would be impacted by disruption to shipping in the Red Sea from Houthi attacks on ships. The company said:
“While we continue to have line-of-sight on potential further gross margin improvements over the coming quarters, we note that the current situation in the Red Sea is leading to elevated spot freight rates and delays to container lead times. The majority of our freight costs are contracted until the end of Q3, but the business is facing additional surcharges from carriers in relation to the longer shipping routes being taken. While there is limited impact on product availability currently, a prolonged issue in the region could also impact supply in the coming months.”
You can read that trading statement here
There is also an update from pub group Young’s today, which says it enjoyed “significant demand across our local communities over the festive period”. Like-for-like sales rose by 7.2 per cent year-on-year for the five weeks to January 1 2024. Young’s has more than 200 pubs across the UK. You can read the company’s statement here.
Another company which is upbeat today is Currys, the electrical retailer. Shares in Currys, which also owns Carphone Warehouse, are up nearly 9 per cent after its trading update. Currys reported a 3 per cent drop in like-for-like revenue in the UK and Ireland for the 10 weeks to January 6, but said that profit margins had been stable and that annual pre-tax profits will now be better than previously expected. Alex Baldock, chief executive of Currys, said:
“In the UK and Ireland, we've kept up our encouraging momentum, in particular selling more of the services that boost margins and build customers for life.”
You can find that statement here.
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Other stories that matter…
1. J Sainsbury, the supermarket chain, is to stop running its own bank and will instead offer financial services through specialist partners. The retailer has also announced that Paula Nickolds, the commercial director of its general merchandise business, is leaving to become chief executive of The White Company. Nickolds used to run John Lewis department stores before joining Sainsbury’s. You can find Sainsbury’s statement on Sainsbury’s Bank here and its statement on the management changes here. Tesco has already said it is looking to sell Tesco Bank and other retailers are also scaling back their ambitions in financial services.
2. Another example of how AI technology is starting to offer useful tools to consumers: Samsung’s new Galaxy phones will be able to translate phone calls and texts made in a foreign language in real-time. More details here
3. Sequoia Capital, one of the world’s leading venture capital firms, has built a network of scouts across Europe to find promising businesses to invest in, including in the UK. These scouts are founders and executives from other companies. The technology website Sifted has looked at what they do and, helpfully, provided a list of who they are. You can find that piece here
4. A fascinating (and short) podcast from Harvard Business Review in which two of the university’s business professors do a case study about how Ikea has been able to shift its strategy and protect its brand since the death of founder Ingvar Kamprad in 2018. You can listen here
5. Writer David Epstein has looked at Boeing and the near-disaster that nearly occurred when a door blew off one of its 737 Max 9 planes. Keeping perspective is vital when analysing such events, he writes. Epstein points to research by psychologists Wolfgang Gaissmaier and Gerd Gigerenzer about “dread hypothesis”, which is an idea that people can allow “high-profile low-probability events” - such as the door blowing off a plane - to change their behaviour and embrace things that are actually “lower profile but actually higher risk”. For example, there is evidence that after 9/11 there was an increase in traffic deaths for drivers outside their home state in the US because more people were choosing to do long drives instead of domestic flights. You can read the full piece here
Podcast…
You can listen to the latest episode of our Business Leader podcast via Substack here, Apple here and Spotify here
The new episode looks at the story behind Castore and how the sportswear brand has taken on Nike and Adidas. Tom Beahon and his brother Phil have built a UK company worth more than £950 million. In the episode you can hear from Tom Beahon about how they founded, built and scaled-up Castore, and the challenges they have faced along the way as the business has got bigger and bigger.
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Best
Graham