High street sees strong performance but forecasts challenges ahead

Retailers are reporting sales and profit increases for the first half but forecasts suggest that the coming six months will be challenging for the high street as Government spending cuts and the VAT increase begin to hit consumer confidence.

Kingfisher, which owns the B&Q DIY chain in the UK, reported a 23% profit rise to £354m for the half year to 31 July. While like for like sales suffered because shoppers are avoiding big ticket purchases such as kitchens and bathrooms, special offers helped boost UK profit 15% to £158m.

Kesa Electricals, which owns the Comet chain, reported an 8.2 % rise in sales. Like for like sales increased 4.3% driven by a “successful World Cup campaign”.

High street fashion retailers Next, Debenhams and John Lewis are also reporting strong performances.

Next registered a 15% rise in profits to £213m and group sales rose 5% to £1.6bn in the first half.

Department store chain Debenhams is forecasting a 20% rise in full year profit when it reports its financial results next month.

John Lewis has reported a 12.4% rise in sales to £3.8bn in the half-year to 31 July and a 28% increase in pre tax profit to £110.5m.

Despite buoyant first half performances, Retailers have warned that the cuts and VAT rise mean that the outlook for the coming six months poses both consumers and retailers further challenges.

The Government is set to announce the full raft of public spending cuts on 20 October which is expected to heavily impact consumers’ disposable income. The VAT rate is also set to increase to 20% on 4 January 2011.

The Office of National Statistics has revealed that August recorded the first decline in sales since January, falling 0.5% across food, clothing and footwear.

Ian Cheshire, Kingfisher group chief executive describes the immediate outlook for consumer spending as “fragile.”

Debenhams chief executive Rob Templeman says the retailer will “remain cautious about the level of consumer confidence going forward” despite “pleasing” profit performance

John Lewis chairman, Charlie Mayfield says: “For the remainder of this year and into 2011, we anticipate more challenging trading conditions as higher taxes and public spending cuts begin to bite and household disposable incomes come under pressure.”

Lord Wolfson, Next chief executive, warns that while the government cuts are necessary they are will “subdue potential growth in consumer spending”.
However, Woflson does not expect a double dip recession or a “meltdown in consumer spending”.

Research revealed by Moneysupermarket.com today (16 September) also found that consumer spending in the run up to Christmas is expected to drop by £2.3bn as shoppers react to the spending cuts.

Retail analysts however believe that the Christmas trading period will see a bounce back in sales and retailers are unlikely to cut marketing investment throughout the key trading period.

Next Marketing Director Christine Gerrard, says: “There will be no change for our Christmas marketing at all this year. There will be a big print marketing campaign and all the other activity and the same activity we have for the last three years.”