The real world of retailing

I hate to be a Jeremiah but I really cannot summon up much enthusiasm for the latest figures from major retailer Marks & Spencer. Nor do the figures offer cause to feel more optimistic about the High Street in general.

All one can say is that M&S has done better in the latest quarter, a reflection of the difficulties it has gone through over the past couple of years.

While group sales are up 2.7% in the 13 weeks to September 26, the numbers are inflated by strong growth in international sales, an area where M&S has met with mixed success over the years, and a particularly stronger performance online, where M&S has been slow to cash in.

UK sales are up just 1.9% overall while like-for-like sales are 0.5% adrift. It is not hard to find the main culprit: sales of products for the home are down 1.8% overall. One wonders when someone will bite the bullet and draw a line under this persistently poor part of the business. No doubt that will have to wait for a change at the top.

Home sales continue to provide a distraction from clothing, the best performing part of the business at the moment, and from food, where sales were higher overall but flat on a comparable basis.

Meanwhile margins continue to suffer in the competitive retail sector, which is forever running just to stand still. Gross margins will be down by between a half and one percent in the current financial year though that is admittedly a considerable improvement on earlier projections thanks to better stock control, which means fewer goods being sold off at reduced prices.

In a show of confidence, chairman Sir Stuart Rose is taking on an extra 20,000 employees in the run-up to Christmas compared with 15,000 last year. There are, however, two big imponderables.

Firstly, this year’s festive figures are likely to be inflated by the temporary VAT reduction. If, as is planned, VAT goes up on January 1st--or if any extension to the reduction is not announced in advance--then the outlook for the early part of next year is bleak, especially for home sales, which stood to gain most from lower VAT rates. Retailers, according to Rose, are asking only for a one-week extension.

Secondly, M&S has in the past disrupted Christmas by holding ‘one-day spectaculars,' with heavily reduced prices at the height of the Christmas spree. It needs to avoid a repeat of an exercise that sceptics feel mainly brings in shoppers who would have come in anyway and would have paid higher prices.

As if all that wasn’t enough, the search for a new chief executive to be appointed next year continues, creating further uncertainty.

Rose predicts a tough 2010 on the High Street. You can’t argue with that. Watch out for the next update alongside half year results on November 4.

The unreal world of banking
Several readers have asked me to comment on the deal by Barclays under which the bank has dumped $12.3 billion of toxic debts into a new company called Protium.

However often you read the Barclays statement it is virtually impossible to see any kind of sense in it or to grasp what the point of it all is. In earlier times one would have simply assumed that Barclays knew what it was doing in the strange world of esoteric finance but the events of the past two years have highlighted that banks have little more idea than the rest of us what toxic loans are all about.

Briefly, Protium has been set up by two former Barclays executives. Barclays is handing over toxic assets that have been valued at $12.3 billion, Protium will collect the debts and pay back $12.3 billion plus interest over 10 years. The Protium directors are raising an additional $450 million which is effectively earmarked to pay their salaries over the next 10 years.

So what is in it for Barclays? It is easier to see what is not in it. Barclays still has toxic assets of $12.3 billion on its books and if the borrowers fail to pay up and Protium goes bust then Barclays does not get its money back. On the other hand, if more borrowers than expected cough up, Protium keeps the extra.

Nor does Barclays get these assets off its balance sheet. The deal will not reduce the regulatory capital required and could actually lead to an increase in the amount of capital that the bank has to set aside to cover any default in the loan it has made to Protium.

One reader of The Week has suggested that the ruse is to avoid reporting on the value of the assets, so Barclays avoids the ignominy of reporting any further writedowns. However, the bank has promised to report on changes of market value of the assets, although it does not say how often. It is possible that Barclays will start to slide out of this undertaking over time.

Barclays gives three reasons for the deal, two of which are corporate jargon that say nothing meaningful. The third is outrageous: securing long term access to an experienced team specialising in managing credit market assets.

Hang on. These two executives setting up Protium come from departments that helped to create this mess in the first place. They were already Barclays employees, so Barclays already had access to their expertise. If they can recover the dodgy loans plus enough to pay Barclays interest on top, they could have done that working for Barclays.

The whole thing smacks of a desire on the part of Barclays to hand over the assets and hope that the whole sorry business will go away. This may well happen over the next ten years but one cannot help feeling that the Protium two stand to gain a good deal more than Barclays.

Hobson's choice
Some comedian who calls himself Keneth Williams (yes, just one N in Keneth) emails me with a well worn scam. Apparently some property magnate called Hobson died in a plane crash along with his wife and son, leaving no-one to inherit his fortune. I get 40% if I claim to be the next of kin, with Williams taking 50% and 10% going in expenses.

It’s probably best not to try this out on a financial journalist, though we can be as gullible as the rest. Williams says that he knows I am not the next of kin yet claims the scam is perfectly legitimate.

Williams claims to be a banker living off the Old Kent Road in south east London, not a favourite haunt of bankers but then again his career has probably been stalled by his abysmal command of English. Any banker worth his salt should know that no-one called Hobson ever made a fortune.

ExCellent opportunity
I shall be at the IX Investor Show at the ExCel Centre, London, tomorrow (Saturday) afternoon taking part in a panel discussion and talking to visitors about stock market investment for beginners and less experienced investors. Free tickets for the event are available here.

Gorilla Run
Many thanks to those generous readers who sponsored my daughter Marie on the Great Gorilla Run in the City of London last weekend. I have no means of contacting you individually so please accept this collective thanks. She completed the course and reached her sponsorship target.