Retailers enjoy a summer sales revival buoyed by receding inflation and Euro 24

Retailers are enjoying a mini summer sales revival, supported by warmer weather, slowing inflation, improving consumer confidence, the prospect of an imminent interest rate cut and strong performances by England in UEFA Euro 24 boosting consumer spending. This hopeful outlook follows a mixed spring period for the retail sector, which has struggled to recover fully from a nearly three-year cost of living squeeze.

UK retail sales rose by 2.9% in April, according to the Office for National Statistics (ONS), reversing a run of three declines in five months, including a 1.8% month-over-month drop in April (revised up from -2.3%), as poor weather reduced footfall. May’s rebound marked the fastest recovery since January and was significantly larger than the estimated 1.5% expansion predicted by a Reuters poll of economists. The increase in May raised sales volumes to the highest level since October 2022, raising annual growth in sales from -2.2% in April to +1.2% in May, its highest since March 2022.

Retail sales were broad-based with volumes rising across all main sectors, led by online retailers which rose by 5.9% on the month as the inflation squeeze which has stifled consumer spending showed early signs of finally abating. Separately, British Retail Consortium (BRC) data showed sales volumes were up 2.1% by value and up 1.2% by volume. Larger retailers outperformed small retailers, with clothing and footwear particularly benefitting from warmer weather, although overall volumes remain below 2021 levels. Retailers continue to pass on price cuts to shoppers, including reductions in furniture prices and TVs to revive subdued demand for big-ticket items ahead of a summer of sport, including Euro 24, Wimbledon and the Olympics.

From a longer-term perspective, retail sales volumes have been stable for most of the past two years. However, the amount of money spent by consumers has increased significantly due to rising prices. Andrew Wishart, Senior UK Economist at Capital Economics, explains: “In the absence of rapid price rises, there is scope for retail sales volumes, as well as values, to rise. Overall, the retail sales data for May showed tentative signs that strengthening real income growth now inflation is back at target is feeding through to stronger spending.”

Brighter summer ahead for retailers

Retailers and economists anticipate a brighter trading period ahead. Receding inflation is central to the optimistic outlook for retailers, as inflation often leads to higher consumer prices while sales volumes decline, masking deteriorating trading performance. Over the year to May 2024, volumes rose by 1.3%, and were just 0.5% below their pre-pandemic level in February 2020, according to the ONS.

Headline inflation hit the Bank of England’s 2% target in May for the first time in three years. May’s consumer price inflation (CPI) figure rose by 2.0% in the 12 months to May 2024, down from 2.3% in the 12 months to April, and well below its recent 40-year peak of 11.1% in October 2022, according to the ONS. Slowing price increases for food, non-alcoholic beverages and furniture all helped soften inflation. Food inflation is now lower than at any time since 2021, according to the BRC, helped by falling prices for butter and coffee, while non-food prices have fallen from this time last year as retailers discount to stimulate sales.

If inflation remains stable, the Bank of England may be willing and able to start cutting interest rates in August, but the pace of monetary easing will be dependent on the strength of the ongoing recovery in economic activity. During the first quarter, the UK economy grew at the fastest pace in three years with revised Q1 GDP rising by 0.7%, reflecting the highest growth among the G7 nations and reversing two prior quarters of negative growth, according to the ONS. It was followed by zero monthly growth in April.

S&P Global has forecast that annual GDP will expand by 0.3% in 2024, before rising to 1.4% in 2025. Consumers are starting to anticipate improving conditions, reflected in consumer confidence reaching a two-and-a-half-year high in June, as measured by GfK. It was the third consecutive month of rising consumer confidence, which reflects that a brighter assessment of the broader economy outweighs concerns over their personal finances. However, sentiment remains well below its pre-pandemic average.

In addition, the 2p National Insurance tax cut and the increase to state benefits in the Spring Budget, both effective in April, have helped to loosen the grip of the cost of living squeeze and mitigate the impact of elevated borrowing costs on household budgets, spurring consumer spending. This upbeat outlook is evident in recent earnings reports from major retailers. In late May, M&S reported a 58% rise in annual profits to £716m, validating its turnaround strategy to close less profitable stores and open more food stores. CEO Stuart Machin reportedly said consumers were “feeling more optimistic about things”, although still conscious of higher mortgage rates and focused on value.

The UK clothing retailer Next – considered a bellwether for British consumers – reiterated its profit forecast of nearly £1bn this year. Last year, the fashion and homewares retailer made £918m in pre-tax profit after raising its outlook five times as demand surged. Next said it expects its cost pressures to recede, helping to unwind some of the higher costs absorbed by consumers in the past two years. “The consumer environment looks more benign than it has for a number of years, albeit there are some significant uncertainties”, CEO Simon Wolfson reportedly said. “Most consumer trends have gone back to where they were pretty much pre-pandemic.”

Tailwinds arrive too late for a dozen UK retailers

The prospect of all these tailwinds has come too late for around a dozen UK retailers this year, which have been forced to call in the administrators. According to figures from the Centre for Retail Research, 12 retailers fell into administration in the first 4 months of the year affecting more than 11,600 jobs. British fashion retailer Superdry is reportedly preparing an accelerated sale process if creditors, including landlords, block the founder’s plans to inject up to £10m of his own money into the fashion chain in a bid to stave off insolvency, according to Sky News. The restructuring plan would impose sizeable rent cuts on landlords of dozens of Superdry outlets, but creditors reportedly would not benefit from any future recovery in the fashion retailer’s performance. The retailer, which plans to delist from the London Stock Exchange this summer, reported a 23.5% year-on-year decline in group revenue in January, attributed to supply chain and logistics challenges, as well as legacy pandemic disruptions, and the impact of geopolitics on inflation and consumer confidence. 

Ted Baker fell into administration on 22 March and is closing 15 of its 46 UK stores in the coming weeks, putting 245 jobs at risk. Frasers Group is reportedly close to a deal to take over Ted Baker’s British operations, excluding staff. Its founder was forced to quit as CEO in 2019 and has struggled to turn the company around since the pandemic, during which the retailer accrued significant arrears. Authentic Brands Group, which owns the Ted Baker brand, reportedly said the “damage done” during a tie-up with another firm was “too much to overcome”. 

In late January, Lloyds Pharmacy, once the second-largest pharmacy retailer in the UK, also fell into administration. Liquidators revealed that the business, owned by private equity firm Aurelius, owes £293m to 514 creditors, including £228m owed to former owner Admenta UK, according to Retail Gazette. However, liquidators expect only £8.2m of assets can be recovered for preferential creditors and £800,000 for unsecured creditors.

These insolvencies and administrations serve as a reminder that legacy debt can prevent businesses from benefiting from improving trading conditions when they arise. Expectations of a brighter period ahead for the retail sector will not translate into bumper profits across the board. Many smaller retailers remain in a precarious position. 

BTG Advisory offers specialised support for such firms with diagnostic evaluations that uncover opportunities for cost savings, streamlining operations and enhancing the efficiency of working capital usage, leading to improved performance and cash flow. Additionally, BTG Advisory can provide retailers with an independent assessment of their balance sheets. Our team offers guidance on restructuring balance sheets to align working capital needs with growth and investment objectives.