30th Dec 2022 15:45
(Alliance News) - UK retailers will only enjoy a "meaningful" recovery in 2024, with consumer discretionary income to remain under pressure next year too, analysts at Stifel predicted.
Retailers have struggled as the cost of living crisis and sharp interest rates knocked consumer confidence to record lows.
"Although we are hopeful UK consumer confidence will recover from its current lows, we are cautious that a further decline in real discretionary income will temper a sustained recovery until 2024," Stifel analysts commented.
"Our view is that even if the bad news is now known, the impact has yet to fully hit consumer pockets. That matters because there is [a roughly] 60% correlation between real disposable income growth and consumer confidence."
Household budgets are set to face a further "squeeze" in the financial year ending March 2024. The energy price cap rises to GBP3,000 and a universal benefit of GBP400 will be removed, Stifel noted.
"In total, we estimate average household energy and food costs will increase to GBP7,350 in the year to March 2024, and together with the increase in household costs from rising interest rates, these staple costs will rise to over GBP19,000," Stifel added.
In real terms, the investment bank predicts income for discretionary spend will weaken by 7% annually in the year ending March 2024.
Stifel added: "How quickly inflation moderates, and interest and mortgage rates come down, will be key to improving consumer confidence, in our view."
The analysts, however, said it will not be all "doom and gloom" for UK retail until that "meaningful" recovery happens.
Drawing lessons from the global financial crisis in 2008, Stifel said some retailers could outperform. It gave Next PLC, Dunelm Group PLC and Primark owner Associated British Foods PLC as success stories from roughly 15 years ago.
Stifel added: "For 2023, we recommend a fairly defensive stance of buying retailers with high profit
margins, strong balance sheets, sustainable cash flow and with a proven ability to win market share."
Potential success stories include Next, variety retailer B&M European Value Retail SA and greeting card and gifting firm Moonpig Group PLC. For the latter, recent UK postal strikes could represent a "buying opportunity", Stifel added.
A wild year for UK retail has seen Made.com and Joules slide into administration. Naked Wines PLC and AO World PLC have not suffered that some fate but did not enjoy stellar years. Both called time on unprofitable businesses, Stifel added.
By Eric Cunha, Alliance News news editor
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