Retailers to reveal squeeze on spending

TWO of the biggest names in retail will this week attempt to convince investors that they are winning the battle for cash-strapped consumers.

Next - for long the darling of the high street with its emphasis on affordable fashion - has hit tougher times as it battles weak spending and soaring costs.

It has already warned that its ranges could be up to 10 per cent more expensive this autumn and winter amid rising commodity prices, including cotton. A squeeze on household incomes from the hike in VAT is also expected to have taken its toll.

Wednesday's trading update, covering the first three months of the retailer's financial year, is tipped to bring news of a 5 per cent decline in like-for-like sales, according to analysts at brokerage UBS.

Next will be up against tough comparisons with contemporaries Marks & Spencer and Debenhams, both of whom have recently revealed surprisingly robust figures.

M&S reported 0.1 per cent growth in like-for-like sales in the 13 weeks to 2 April, when analysts expected a decline of around 2.5 per cent, while Debenhams posted underlying profit growth of 4.5 per cent to 129.2 million in the half-year to 26 February.

Andrew Hughes, an analyst at UBS, said Next's total sales, which factor in store openings, additional selling space and online takings, should show decent growth. "Although disposable income and consumer confidence are under pressure, the impact has been felt most heavily on large ticket discretionary spending," he said.

Womenswear and childrenswear gave the group and its peers a "defensive" characteristic, Hughes argued, while warmer April weather may also have lifted trading.

Analysts at Royal Bank of Scotland, who have a "buy" rating on Next's shares, said their estimate of a 6 per cent decline in like-for-like retail sales "may prove conservative on account of improved weather during the past few weeks".

A day later, in another shortened trading week, attention will turn to supermarket giant Morrisons. While it is unlikely to have avoided the consumer spending squeeze, Britain's fourth-biggest grocer is set to reveal a resilient performance when it delivers its first-quarter update.

Rival Tesco highlighted the impact of a consumer slowdown and intense competition when it reported a 0.7 per cent dip in its Q4 sales, while Sainsbury's has already prepared the market for a tough 2011.

However, latest figures from Kantar Worldpanel show Morrisons outperformed its rivals by growing its till roll by 4 per cent in the 12 weeks to 18 April. It was the only one of the main players to increase market share, rising to 11.9 per cent from 11.8 per cent a year earlier.

Analysts expect quarterly sales at Morrisons to better Tesco's performance, albeit with marginal growth. Andrew Porteous at Evolution Securities is pencilling in like-for-like sales growth of 1 per cent excluding VAT, which implies negative volumes after inflation.

He said Morrisons' "Fuel Britannia" petrol offer was a canny move, with customer pockets hit hardest by soaring fuel costs.

Clive Black at Shore Capital said the group may also be benefiting as shoppers trade down, given the chain's value credentials.

Morrisons' recently appointed chief executive Dalton Philips has pledged to launch an online shopping operation within two years. The group has earmarked 3 billion in investment over the next three years to catch up with web-savvy rivals.