Asos, Next, Currys shares fall as UK retail sales 'pause for breath'

UK retail sales growth slowed to 1.0% in May, according to the BRC-KPMG survey, following a 7% jump in April, driven by cooler weather and declining consumer confidence. Non-food sales decreased by 1.1%, with online sales dropping 1.5%, while food sales increased 3.6%, largely attributed to price inflation. Analysts suggest this slowdown may lead to a pause in the recent positive momentum for UK discretionary retail stocks, particularly those that have performed well recently, while grocers are expected to remain stable.

Analysis

UK retail sales growth significantly decelerated in May, with total sales rising only 1.0% year-over-year according to the BRC-KPMG survey, a stark contrast to the 7.0% surge observed in April which benefited from favorable weather and a late Easter. This slowdown, characterized by a 3.6% increase in food sales largely driven by price inflation (NielsenIQ measured food inflation at 2.8%), and a 1.1% decrease in non-food sales (including a 0.9% fall in store sales and a 1.5% drop in online sales), reflects waning consumer confidence as essential costs impact households. Barclays' data, covering nearly 40% of UK card transactions, corroborated this trend, showing a 1.0% rise in card spending from April 26 to May 23, down from 4.5% growth in the prior period, attributed to 'falling confidence in personal finances'. While specific sectors like cinema (spending up 19.2%) and airline tickets (up 9.7%) showed strength, the broader discretionary retail sector, particularly fashion and big-ticket items, faced headwinds. Analysts suggest this 'pause for breath', exacerbated by cooler May weather and new cost structures for retailers, may temper recent enthusiasm for UK discretionary retail equities, such as Asos, Next, and Currys, which saw share price declines. Food retailers, however, appear more resilient, potentially benefiting from consumers trading down from casual dining to premium private label supermarket ranges. The overall outlook remains one of cautious optimism for the UK consumer economy, with any significant improvement likely to be gradual and dependent on factors like easing base rates and supportive government policies. The general market sentiment surrounding this news is moderately negative, with a cautious tone.

Key Decisions for Investors

• Investors should exercise caution with UK discretionary retail stocks, particularly those that have experienced strong recent performance, given the observed sales slowdown and declining consumer confidence.
• Consider maintaining or re-evaluating positions in grocery retail, as this sub-sector appears more resilient due to inflationary effects on sales figures and shifts in consumer spending towards value and at-home consumption.
• Monitor key economic indicators such as consumer confidence surveys, inflation data (especially food inflation versus volume), and any changes to UK fiscal or monetary policy, as these will be critical drivers for the retail sector's recovery trajectory.
• Recognize that the current slowdown in discretionary spending might be a temporary 'pause', potentially offering selective buying opportunities in fundamentally sound companies if market sentiment overcorrects, but near-term volatility is expected.