TFTT MONDAY BRIEFING
Retail continues to generate sales growth, but look beyond the headline numbers and the picture becomes rather less comfortable. Some of the biggest names in the industry are finding that selling more does not necessarily mean making more money. Primark is investing heavily to strengthen its proposition, M&S is still rebuilding profitability in Fashion, Home & Beauty, and retailers are facing a tougher economic environment as interest rates rise and costs remain under pressure.
This week, we look at what is happening beneath the sales figures, why operational execution matters more than ever and what the latest economic developments could mean for the months ahead.
PRIMARK: Sales are growing, but profit is going backwards
Primark's latest annual results make for interesting reading. Revenue increased by 4% to £9.8bn, but adjusted operating profit fell by 11% to £1.005bn. Its operating margin also dropped from 11.9% to 10.2%.
There is another important detail. Like-for-like sales fell by 2.6%, while new store openings contributed 5% to overall sales growth. So, although the business is expanding, its existing estate is still facing a challenging trading environment.
Primark has been investing in lower prices, marketing, product and digital to strengthen its customer proposition. That investment is important, particularly as it looks to compete in markets where consumer confidence remains weak. But it is also putting pressure on profitability, alongside weaker like-for-like sales and markdowns.
There is nothing wrong with investing for growth. In fact, retailers that stop investing risk losing relevance and market share. The question is whether that investment delivers a sufficient return.
For Primark, the next test is not simply how many more stores it can open. It is whether it can improve performance in its existing stores while maintaining the value proposition that has made the business so successful.
M&S: Selling more fashion is one thing. Making money from it is another.
M&S is another business worth watching. Its latest results show just how different the picture can look when you move beyond the headline sales figures.
Fashion, Home & Beauty sales increased by 17.5% in the first half. However, the previous year was heavily affected by the cyberattack, so that growth needs to be put into context. The more revealing comparison is with two years ago, when the division generated adjusted operating profit of £243.4m. This half, it delivered £150.5m. That is almost £93m less.
M&S has been quite open about what needs to improve. Product availability, stock management and the cost of fulfilling online orders have all affected performance. It has also acknowledged that parts of its womenswear offer became too focused on trend-led product, rather than getting the balance right across the range.
This is particularly interesting because M&S has a strong brand, a loyal customer base and considerable momentum in its food business. Yet translating that strength into consistent profitability across fashion remains a work in progress.
It is a reminder that having the right brand and attracting customers is only part of the job. Getting the product right, buying accurately, managing stock and delivering efficiently are what ultimately determine how much money a retailer makes.
THE ECONOMY: A difficult combination for retail
The wider economic picture is adding another layer of pressure.
Last Thursday, the Bank of England raised interest rates from 3.75% to 4%, its first increase since August 2023. It also warned that inflation could reach around 5% by the middle of 2027, largely driven by higher energy prices linked to the conflict in the Middle East.
Andrew Bailey was clear that further increases are possible if the situation continues, although he stressed that another prolonged cycle of rate rises is not inevitable.
For retailers, this is a difficult combination. Higher borrowing costs can make investment more expensive, while rising household bills leave consumers with less disposable income. At the same time, businesses are dealing with their own cost pressures, making it harder to protect margins without passing costs on to customers.
The Budget has also attracted criticism from business groups, with concerns that more could have been done to encourage investment, support growth and give businesses greater confidence to hire.
Retailers need customers who feel confident enough to spend, but they also need an economic environment in which businesses can invest and grow. At the moment, neither can be taken for granted.
WHAT TO WATCH THIS WEEK
There are three developments worth following over the coming days, particularly given the pressure on consumer spending and business confidence.
MONDAY – ANDREW BAILEY
Following last week's interest rate increase, attention will turn to comments from the Bank of England Governor. Will he offer any further clues about the possibility of another rise? With inflation expected to approach 5% next year, retailers will be watching closely.
TUESDAY – BRC RETAIL SALES
The latest BRC retail sales figures should give us another indication of how consumers are behaving. Are shoppers still spending, or is the pressure on household finances beginning to have a greater impact? The distinction between value growth and actual sales volumes will be particularly important.
THURSDAY – UK GDP
The latest GDP figures will provide a broader picture of the health of the UK economy. After the Budget and last week's interest rate decision, the numbers will help show whether the economy has enough momentum to support business investment and a sustained recovery.
THE TFTT VIEW: Growth is only part of the story
There is a common thread running through all three stories. Retailers are still finding opportunities to grow, but the economics of achieving that growth are becoming increasingly important.
Primark is investing in its proposition and expanding its international footprint, but needs to improve the performance of its existing stores. M&S has a powerful brand and growing customer demand, but still has work to do to get its fashion business back to the levels of profitability it achieved previously.
Neither business has a simple problem to solve, and both demonstrate why the fundamentals of retail matter so much.
We have spent a lot of time talking about growth, digital transformation, customer experience and new opportunities. All of these are important. But none can replace the basics of running a good retail business: understanding your customer, getting the product right, buying well, managing stock, delivering efficiently and knowing your numbers.
The economic environment is unlikely to make that any easier. With interest rates rising, inflation threatening to increase again and consumers facing continued pressure, retailers will have to be increasingly disciplined about where they invest and what return they expect.
Ultimately, the strongest businesses will not necessarily be the ones reporting the biggest sales increases. They will be the ones that understand how to turn customer demand into sustainable profit.
Because in retail, growth is good. Profitable growth is what really matters.
TFTT INSIDE FASHION. NOT OBSERVING IT.
