UK retail is papering over the cracks of a disappointing Christmas, says Knight Frank’s head of retail research

Stephen Springham, head of Knight Frank’ retail research, questions the merits of retailers’ Christmas trading statements for providing an insight on profitability

The festive period is over for another year and the UK retail market traverses from one silly season to the next, the post-Christmas reporting period. The frantic attempts to entice shoppers to part with every last penny of their cash give way to a round of trading statements from the retailers themselves, reporting back on how they performed over the all-important peak season.

All the major retailers reporting en masse should, in theory, provide crystal-clear transparency as to how the retail sector performed over the festive period. In reality, this is seldom the case for a number of reasons. For the most part, Christmas trading statements (unlike interim and full-year updates) are unaudited, giving retailers greater latitude as to what they report. That is not to suggest that the figures themselves are fabricated (heaven forbid), but it does allow retailers to be flexible on issues such as the time period they report on. Given the peaks and troughs of festive trading, incorporating or excluding a single day in a year-on-year like-for-like comparison can massively distort a growth figure – a small one can easily become a large one, a negative one suddenly a positive one.

By the same token, it is often misleading to directly compare and contrast the growth reported by individual operators, as few will be reporting on the exact same trading period – even a few days difference can severely inflate or deflate sales performance. A rough barometer of ‘winners versus losers’ maybe, but not a watertight head-to-head comparison.

But the real limitation of most Christmas trading statements is the lack of detail on profitability. Most will only focus on sales performance and gloss over what bottom-line sacrifices have been made to achieve a positive headline. Unless performance has been so poor that the retailer is compelled to issue a profit warning, any bad news is likely to be brushed under the carpet until the audited full-year or interim figures are released later in the year.

For these reasons, many of the forthcoming Christmas trading statements should really be taken with a pinch of salt. Many retailers will report apparently strong sales growth, but it would be wrong to conclude that Christmas 2015 was a bumper period for the UK retail sector.

Ahead of the ‘official’ ONS retail sales data for December (which isn’t released until 22 January) what was the real picture of Christmas trading? On the evidence to date, overall volume sales held up fairly well – earlier projections of growth of 3-4% don’t appear to be wide of the mark. But this doesn’t tell the full story. As an ‘event’, Black Friday proved to be a damp squib. However, unprecedented levels of promotional activity and discounting generally continued to cast a shadow over the retail sector. Deflation and margin erosion are hardly the hallmarks of prosperity.

For every headline of positive sales growth in the coming days and weeks, there is probably a more telling story of profitability coming under pressure.