The British Retail Consortium has just announced that total sales fell in 2019 by 0.1%. This is the first time that sales have fallen in 25 years. Tesco has just released Christmas trading figures which confirm that like for like sales fell by 0.2% in the 19 weeks to 4th January. Sainsbury has also issued results which confirmed that like for like sales were down by 0.7%. The drop in sales was compounded by the lacklustre performance of Argos.
I am not going to repeat the observations about the death of the High St or the demise of retail. I do want to reflect on the difficulty that underwriters and lenders face when attempting to forecast how much free cash flow a business will generate in the future.
What will you get for Christmas 2024?
Very often the gifts that are given are driven by ’affordability’ or access to credit. We all find it difficult, on a personal level, to estimate how much disposable income we will have in December 2024. W Who knows what financial pitfalls might lie in wait: burst pipe, car repair, new school uniforms or broken household appliance. It is exactly the same for business.
The results for Greggs have been outstanding (in retail terms) and all staff are to receive a bonus of £300. The upswing in performance, sales have broken the £1 billion barrier, has been driven by the launch of its vegan sausage roll. Who would have forecast that the launch would have been so successful?
Another success story is Next. Sales for the Christmas period have risen by 1.5% which was much better than the forecast 0.3% Closer examination reveals that in-store sales fell by 6.1% whilst on-line sales increased, by a delightful, 13.6%. Lets us not forget that Next had issued a profit warning at this time last year. Who would have forecast that turnaround in performance?
There are businesses in the retails space that are performing well because they have modified their strategy or are selling the right product at the right price. Underwriters or relationship staff have a challenge in determining how much cash a business will generate in the next 12 months. The performance of the businesses listed above tells us that a simple approach such as last year’s sales plus X% is not nearly sophisticated enough.
What do underwriters need to do?
Underwriters, relationship staff and the finance teams of businesses need to break their business down into key segments. This may be in-store and online. Or food, general merchandising, electrical good and toys. Assumptions about future performance should be aligned with market trends and the particular business’ position in the market. For example, Greggs were well placed in the market. The launch of their vegan, sausage roll, perfectly matched the mood of the market. So, we should not be overly surprised by the 10% growth in sales.
What will we get for Christmas 2024? To answer this question, we need to breakdown sales and margins into their principal elements and build key performance assumptions that reflect identifiable trends in the market. Of course, this is easier said than done. However, without this effort, we may find that our Christmas stocking is less full than we anticipated.
Author: Bill Liddell, Director.