Spotlight on FTSE retail stocks

The Christmas trading period is important for retailers. For some, it can make or break the year.

There is a lot of anxiety around Christmas 2022 – among investors and businesses.

Most retail stocks – and stocks in other sectors that look to consumer discretionary spending – have fallen out of favor with investors over the year, as inflation has risen.

And there are ominous sounds from some business. Toys, games and giftware group Character said in October that he anticipated the challenging situation “a very important Christmas trading period,” with an “Expected reductions in consumer spending … due to concerns about rising cost of living.”

Two weeks into January, we’ve had plenty of trading updates from retailers. How, and what are the prospects for 2023?

Up and down

Here’s how the market reacted – the stock price movement of the day – to the updates published by the retailer in the first two weeks of the year:

• ASOS: +20.9%
• JD Sports Fashion: +7.0%
• NEXT: +6.9%
• Shoe zone: +5.4%
• Card factory: +5.0%
• DFS Furniture: +1.5%
• Marks and Spencer: +1.3%
• Tesco: +0.9%
• B&M European Vale Retail: +0.5%
• Topps tiles: -0.6%
• Greggs: -1.0%
• N chocolate: -1.1%
• Sainsbury’s: -1.6%
• Game workshop: -2.5%
• AO World: -5.4%
• Hornby: -15.5%
• Halfords: -18.7%
• Virgin UK Wines: -24.1%

Online struggle

Troubled online fashion retailer ASOS is a big riser. However, this was more about the new chief executive’s turnaround plan than sales, which fell 6%.

Online retail has generally been weaker, with Royal Mail attacks disrupting this year, compared to last year’s digital sales of the Omicron variant of the coronavirus.

Virgin Wine, which issued a profit warning, was a big online victim, because it suffered from the addition of major problems caused by the new warehouse management system.

Another fighter

Two other double digit fallers are also warned in profits. Hornby said the danger is as a result of “challenging consumer economic climate”.

Halfords blamed the inability to recruit enough skilled auto technicians, as well as the expectations of “A deeper decline in demand for higher ticket items”.

Elsewhere in the top spot, AO World shares fell on the day. DFS Furniture sees a modest uptick, but cautions that meeting the forecast for the end of the financial year in June will depend on the continued momentum of orders.

Famous winners

Updates from fashion retailers JD Sports Fashion, NEXT and Shoe Zone were well received in the market.

High street bellwether Next lifted its profit guidance for the year to £860m from £840m after a strong sales performance.

However, preliminary guidance for next year is that sales and profits will fall by 1.5% and 7.6%, although they admit that “Some may think this forecast is too cautious.”

Cash and credit

Most retailers had a good Christmas. The cost of living crisis may be here, but it seems many consumers are spending their money during the festive season.

At the same time, an early January poll for the BBC showed a third of respondents who used credit to help get through Christmas said they were unsure about their ability to repay. And debt advice charity StepChange reported a rise in inquiries post-Christmas.

Outlook for 2023

It remains to be seen whether consumers have splurge last, and now will slash discretionary spending. If so, we could see a decline in the retailer’s profit forecast as 2023 progresses.

On the other hand, if the cost of living pressure starts to decrease, things may be different. And, for example, the Next forecast for the year can really prove it “be very careful.”

Our focus

As always, there are likely to be some deviations from the market’s view of the economic outlook at the start of the year.

That’s why, at The Motley Fool, we focus on the long term. We want to invest in companies not based on how we think the business and stock price may perform in the coming quarter, half year, or year, but over a multi-year economic cycle.

Patience is rewarded

Retail stocks are currently depressed in the market’s view of the short-term outlook for the economy. This shows that there are opportunities in the sector for long-term investors to buy today and reap high rewards in the future for their patience.

There are some great companies out there, with great management teams, great business models, and strong balance sheets. What rational investor wouldn’t want to own a slice of that business when it can be bought for so little?