Retail giants predict gloomy new year as festive sales fall

Entertainment retailer HMV's shares tumbled 20 per cent after it issued a profits warning and announced plans to close 60 of its HMV and Waterstone's stores. Underlying sales slumped 13.6 per cent at its 600 UK and Irish stores in the five weeks to January 1.

Next, the UK's second-biggest fashion chain behind Marks & Spencer, estimated 22m was wiped from sales by heavy snowfall. Its underlying sales fell 6.1 per cent over the key Christmas trading period.

With shoppers still reeling from this week's VAT rise and little sign of consumer sentiment improving, analysts warned conditions are likely to remain tough for retailers in 2011.

"The likelihood is that consumer spending will be limited in 2011 and we expect it to only rise by around one per cent in real terms," said Howard Archer, economist at IHS Global Insight.

Retail expert Randal Casson at PwC in Leeds predicted consumers will go on a "post-Christmas retail diet".

He added large shopping centres may have benefited from the heavy snowfall, with Meadowhall in Sheffield and White Rose in Leeds obvious winners.

"If you cannot get to the shops you're going to go to a big mall where you can hit lots of shops at the same time," he said.

HMV said it is taking "aggressive action" to combat tough markets, closing 10 per cent of its UK stores – 40 HMV shops and 20 Waterstone's branches. It added it has earmarked another 10m of savings.

"The challenging markets, combined with severe weather over our peak trading period have had a negative impact," said the group. "In addition, there are well-reported headwinds as we enter 2011."

The books-to-DVDs retailer has a crucial debt covenant test in April, and warned meeting it will be tight. Its shares shed 6.5p to close at 26p.

"The market largely expected a profit warning, but the news is still depressing," said Arden Partners analyst Nick Bubb, adding poor weather had only added to more fundamental problems in HMV's markets where rivals like Borders UK, Woolworths, and Zavvi have gone out of business in the past couple of years.

However, Mr Casson said swathes of retail failures, such as those seen in winter 2008, are unlikely.

"What you're likely to see is more of a response like HMV where there will be cutting back – (it will be) pruning rather than castration."

PwC retail specialist Anna Bielby said some retail failures may emerge at the end of March, when the next quarter's rent is due. "It's going to be a tough year with consumers cutting back," she said.

Next, which runs around 500 stores in the UK, said despite December's snow, it is sticking to profits forecasts, boosting its shares 4.4 per cent to 2,103p.

Next chief executive Simon Wolfson said he expected price rises to be a bigger factor in dampening consumer demand in 2011 than Government cuts and tax rises.

He expects Next's prices to rise about eight per cent in the first half of 2011 as a result of higher costs, particularly cotton, and the rise in VAT from 17.5 per cent to 20 per cent.

"The outlook for 2011 is uncertain," said the group. "The impact of Government cuts on consumer spending is still unclear and we have yet to fully understand the impact of rising retail selling prices on overall demand."

The group estimated full-year pre-tax profits will range from 540m to 555m, representing seven to 10 per cent growth on a year ago. It added earnings per share will have been boosted by cash generation and share buybacks.

Sales at Next's Directory home shopping business rose 8.7 per cent but retail sales were down 3.1 per cent.