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June 2011
Carl Paraskevas Director of Sector Economics | Economic Research T: +44 (0)207 158 1741 E: carl.paraskevas@lloydsbanking.com
We expect real UK household disposable income to fall in 2011, as inflation outstrips wage growth, a key headwind to discretionary UK retailers
Real Disposable Household Income % change from previous year 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5
0 20 4 20 05
2.1% 1.3%
-0.7% -1.0%
06 007 008 009 010 11F 12F 13F 14F 2 2 2 2 20 20 20 20 20
Source: LBCM
Non-food retail sales by value and volume are growing, but moderating in pace
Non-Food Retail Sales by Value and Volume % change 3 month change on three months a year earlier, SA 14 12 10 8 6 4 2 0 -2 -4 -6
20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11
SECTOR OUTLOOK
June 2011
Retail sector performance is set to moderate based on the latest quarterly CBI distributive trades survey
% balance 30 20 10 0 -10 -20 -30 -40 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2
CBI Retail Expectations Next Six Months 3 quarter moving average) - leading 1 quarter Retail Output - Services Index (RHS)
Games
Household textiles
Beer
Profitability improves
Despite the weak trading environment, retailers are showing resilience through better management of costs, inventory, and capital spending. There was sharp rise in retail inventories in Q1 2011, up 2.6bn in real terms, but inventory to sales ratios have hardly moved, reflective of the higher sales levels. In terms of capital spending, the distribution sector has shown signs of pull back, falling by -3.2% in Q1 2011 compared to the same period last year, after rising by 8.27% for the full year 2010. Such proactive measures combined with a better trading environment than experienced during the recessionary years have improved the bottom line of the majority of listed retailers, illustrated by increased profit margins and returns on capital. However, underlying uncertainty in future performance still weighs on valuations, which on EV/EBITDA basis remain relatively low compared to the pre-recession period. Valuations peaked at 9x EBITDA in 2006 and are now currently stands at 5.7x.
Profitability and returns on capital have improved for retailers, but uncertainty remains high
FTSE General Retailer Index Operating Margins and Return on Capital
% 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0
01 03 05 07 02 04 08 09 06 10 20 20 20 20 20 20 20 20 20 20 C ur re nt
% 25 20 15 10 5 0
Recording media
Tobacco
SECTOR OUTLOOK
DISCLAIMER
June 2011
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