The UK Retail Sector finds itself on the wrong side of UK Index fence this morning, with more signs of pain on the high street. Grocer Morrisons may have reported its best quarterly growth in nine years, and offered another special dividend (smaller than last time, mind), helping its shares +0.4%. However, retail peers like Marks & Spencer (-2.2%), Kingfisher (-0.4%), Next (-0.6%), Tesco (-0.0%), Ocado (-0.3%) are lower, with only rival Sainsbury (+0.1%) up on the day.

The reason for widespread weakness (admittedly on a flat-to-down day for the UK Index ), may be more to do with negative read-across from John Lewis (not listed but important high street barometer). The department store says first half profits had evaporated by 99% due to a necessary price-matching extravaganza that squeezed margins. It also observed the “retail sector was facing challenging times” (no news but an unwelcome reiteration) and warned that “full year profits would be substantially lower”. Its pledge “never knowingly undersold” has come at a hefty price.

Furthermore, for anyone looking for Retail M&A to boost sentiment, that’s a no-no. Sports Direct (-0.7%) has responded to speculation about it buying the remaining ~70% of Debenhams (-5.3%) to merge it with recently rescued House of Fraser, confirming it doesn’t intend to make an offer (“hands full with House of Fraser”). This should preclude it from doing so within the next six months. It also leaves Debenhams traders focusing on the latest news that it has called in KMPG to advise on its “options”, keeping open the possibility that it follows other major names into the demise of administration or a CVA.

But maybe that’s what Sports Direct owner Mike Ashley ultimately wants. To pick up Debenhams on the cheap. With all the stock and without the debt Just like he did with House of Fraser.

Mike van Dulken, Head of Research, 13 Sept 2018