Burberry shares sank on Friday after the luxury retailer cut profit guidance after a poor end of year trading period.

Falling sales in the Americas and EMEA culminated in a 7% drop in reported revenue.

Investors will be concerned whether falling sales are primarily a result of a general slowdown in the luxury sector or if Burberry’s brand is losing its appeal. Today’s announcement doesn’t provide enough information to determine the factors behind falling sales and upcoming results will be poured over for comparisons against their peers.

Nonetheless, the drop in sales meant the group revised its operating profit guidance for the year down to £410m to £460m. The fashion brand has set itself a £4bn full-year revenue target which looks a long way off after today’s update.

Burberry shares sank over 10% to 1,221p in mid-morning trade on Friday.

“So much for the roaring twenties. The idea that wealthier individuals would completely brush off inflation and the cost-of-living crisis has been thrown in the bin. No sector is entirely immune from such pressures and over the past six months or so we’ve seen cracks appearing in the luxury goods sector as demand wanes,” said Russ Mould, investment director at AJ Bell.

“Burberry already flagged problems two months ago and now it says trading has seen further deceleration, meaning full-year results will miss expectations. The Americas and South Korea are the biggest problem areas for the group, judging by store sales trends.

“So, what can it do? Unlike your average fashion retailer, it is simply not the Burberry way to slash prices and hope bargains lure in shoppers. The luxury goods scene is about trying to make consumers want to have something exquisite and premium priced to give the illusion that it is only available to the elite. Discounting would tarnish the brand. Therefore, Burberry has no choice but to ride out the storm until the wealthier are feeling confident enough to splash the cash once more.”

The FTSE 100 fell on Thursday as traders digested US CPI inflation data that dampened hopes of a Federal Reserve interest rate cut in March.

The FTSE 100 had been substantially higher earlier in the session before the rally faded and gains turned to losses. London’s leading index was around 0.5% lower shortly after US cash equity trade began on Thursday.

US CPI for December came in at 3.4% compared to expectations of 3.2% and higher than the 3.1% November reading.

“US CPI came in higher than expected on both a headline and core basis. These latest figures could give fuel to the hawks and reinforce both the USD strength and rise in US yields we’ve seen so far in 2024,” said Ryan Brandham, Head of Global Capital Markets, North America, at Validus Risk Management.

There was little movement in both UK and US equity markets after the data hit the wires, suggesting that although hotter than expected reduced the chances of a rate cut in March, it didn’t completely rule it out. However, as US trade got underway, stocks on both sides of the pond sank.

“Markets had all but declared the battle with inflation over in the final few months of 2023, but these readings add weight to the argument that the final efforts to get inflation down to target may be trickier than expected. The inflation figures are compounded by stronger than expected initial jobless claim figures, coming in at 202k for December, compared to expectations of 210k,” said Dan Boardman-Weston, Chief Executive at BRI Wealth Management.

“It is still likely that the Federal Reserve will start cutting rates in the coming months, in the face of a slowing economy and further progress on inflation, but markets may need to readjust their assumptions as to the timing and quantum of interest rate cuts during 2024.”

FTSE 100 movers

Marks & Spencer was the FTSE 100’s top faller after the group said food sales rose 10% during the festive trading period but held off increasing profit guidance for the full year.

Marks & Spencer investors took the cautious tone as an opportunity to book profits after a strong run, and shares were down more than 4% on Thursday.

“Shares in Marks & Spencer rallied in the days before the results as investors looked at strong updates from Aldi and Lidl, plus a resilient showing from Next, and concluded that M&S could also do well,” said Russ Mould, investment director at AJ Bell.

“The shares have given back some of those gains on the trading update as investors with a ‘better to travel than arrive’ mindset bank some profits. There are also enough words of caution in the update to stall momentum in the share price.”

Tesco also released a solid set of results on Thursday and followed the ‘buy the rumour, sell the fact’ playbook with minor losses.

Whitbread was the top gainer after releasing stellar Q3 results and saying accommodation sales were now 39% ahead of pre-pandemic levels. Whitbread shares were 3% higher.

“The owner of the UK’s largest hotel chain has plenty to celebrate as it heads towards the end of its financial year. In the UK Premier Inn’s rooms on average generated 9% more in the third quarter than they did in the comparable period, some 39% ahead of pre-pandemic levels,” said Derren Nathan, head of equity research at Hargreaves Lansdown.

Whitbread shares jumped on Thursday despite a slight dip in quarter-on-quarter occupancy to 84.9% as the UK’s largest hotel business’s income rose 39% above pre-pandemic levels in Q3.

Whitbread’s shares were up 3% at the time of writing on Thursday.

Whitbread’s Premier Inn achieved an 11% surge in total accommodation sales, driven by robust demand in both London and the regions.

The total revenue per available room exhibited 9% growth and an outstanding 39% increase compared to FY20, marked by high occupancy rates and robust pricing.

“But there were a few signs that Whitbread is having to work a little harder to keep its room full. Quarter-on-quarter occupancy fell over a percentage point to 84.9%. And whilst London room rates only nudged down a fraction, compared to the second quarter, they dropped by 11% in the UK regions. In Europe, expansion of the German business is continuing to plan, and Germany’s expected to hit the break-even point at some point in 2024,” said Derren Nathan, head of equity research at Hargreaves Lansdown.

Nevertheless, “Whitbread looks to be well on track to meet forecasted operating profit growth of nearly 25% in the current financial year, but going forward, the comparatives will be a lot tougher,” added Nathan.

Meanwhile, in Germany, total accommodation sales soared by an impressive 61% compared to FY23, aligning with Whitbread’s guidance of a pre-tax loss between £30 million and £40 million for FY24.

“Our teams have delivered another strong set of results,” said Dominic Paul, Chief Executive of Whitbread. “In the UK, we continued to see robust demand for our hotels, driving high levels of occupancy and strong pricing. Our focus on delivering a high-quality proposition at a great price has meant that Premier Inn UK has continued to outperform the M&E market. In Germany, we performed well in what is an important trading period with a large number of leisure and business events; we remain on course to break even on a run-rate basis during the calendar year 2024.”

“We continue to execute against our strategic priorities at pace, and given the structural shift in UK hotel supply, positive current trading, a clear commercial plan, and our ongoing focus on driving cost efficiencies, we remain confident in the outlook,” Paul added.

Looking ahead, “cost growth guidance of between 3 and 4% for next year doesn’t provide too much cause for concern and should allow some flexibility in pricing. A slowing economy may present some challenges,” said Derren Nathan.

“But Whitbread is a best-in-class operator with the financial strength to take advantage of growth opportunities while supporting dividend payments and the current share buyback plan,” he added.

Marks & Spencer shares fell on Thursday after the company reported strong sales growth but didn’t increase profit guidance. The decision to leave profit guidance unchanged gave a cautious tone to an otherwise robust update.

As we noted in our Marks & Spencer festive trading update preview, today’s update was crucial for Marks & Spencer’s shares after a year of strong performance for the stock.

For shares to maintain the rally, investors would have to be convinced momentum in Marks & Spencer’s sales growth continued through Christmas and could continue into the new year.

Evidently, investors were not convinced of this, and Marks & Spencer shares were down over 5% at the time of writing on Thursday.

In our Marks & Spencer update preview, we said:

“Many investors will consider food sales growth the most important metric in the upcoming trading statement. Anything close to first-half growth of 14.7% will be seen as a win for M&S. Revenue for Q3 2023 was £3.6bn, and investors will hope this exceeds £4bn in Q3 2024.“

Unfortunately, total food sales grew by just 10.5% in the 13-week Christmas trading period, a big step down from food growth in prior periods. Sales for the period were £3.85bn.

Marks & Spencer investors book profits

Today’s announcement would always test the UK consumer’s propensity to splash out on expensive groceries during the festive season. Given the ongoing cost-of-living crisis, Marks & Spencer has done a ‘Remarksable’ job bringing shoppers through the door.

“In Food, M&S led the market on volume growth every month over the final quarter of 2023, with a 7% increase across the period. Larger stores performed particularly well as more customers turned to M&S for their full shop. And with cost-of-living pressures weighing on consumers at a historically expensive time of year, the group’s Remarksable value range has come into its element, with sales growing by an impressive 18%,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown.

Chiekrie also noted a respectable performance in M&S’s clothing business amid an effort to revitalise the unit:

“In Clothing & Home, less stock has been making its way to the sale rack, resulting in higher average selling prices and a 4.8% rise in like-for-like sales. The group’s improving style credentials are partly to thank for this, pulling more shoppers through the door over the festive season. As is the group’s reshape programme, which looks to pivot stores to new locations and refresh existing stores to create a more productive estate.”

Marks & Spencer has achieved an astounding recovery over the past year, but signs that the growth rate is slowing have pushed some to book profits in shares that gained ahead of today’s announcement.

“Shares in Marks & Spencer rallied in the days before the results as investors looked at strong updates from Aldi and Lidl, plus a resilient showing from Next, and concluded that M&S could also do well,” said Russ Mould, investment director at AJ Bell.

“The shares have given back some of those gains on the trading update as investors with a ‘better to travel than arrive’ mindset bank some profits. There are also enough words of caution in the update to stall momentum in the share price.”

Tesco, the UK’s largest grocer by market share, enjoyed record sales during the festive period and increased its profit guidance for the year as a result.

In many respects, Tesco is the winner of this year’s round of FTSE 100 supermarket festive trading updates.

Group retail sales combining Tesco’s Q3 and Christmas trading periods rose 6.4% as the grocer successfully fought off the discounters and grew market share by 15bps.

Tesco cut prices on 2,700 products and attracted shoppers with low prices through schemes such as price matching with discounters and Clubcard prices.

In addition to strength in value ranges, Tesco will be delighted with sales performance at the other end of the product range. Tesco Finest range sales rose 16.7% in the UK, achieving a record Christmas trading week as Tesco marked the 17 consecutive period of stealing higher-end spending away from other premium retailers.

Booker sales edged higher as both the catering and retail units produced mid-single digit sales growth.

Profit guidance increased

Robust performance across all of Tesco’s food-focused businesses resulted in a slight increase in profit guidance for the year. Tesco now predicts retail adjusted operating profit of £2.75bn, above its previous guidance range of £2.6bn to £2.7bn.

The increase in guidance is small yet significant. In an environment where peers such as Sainsbury’s have maintained guidance, shareholders will see an increase in guidance as a major positive.

In early trade on Thursday, Tesco shares were little changed, gaining 0.7%.

Given the upbeat release, holders of Tesco shares may have expected more of a reaction. Still, they will be satisfied the stock has gained substantially ahead of the results, and the market reaction to the festive trading update was materially better than peers Sainsbury’s and Marks & Spencer.

“Tesco has managed what Sainsburys couldn’t quite muster, which is a profit upgrade for the full year. The tills were chiming away over Christmas, and the slightly conservative previous estimates, coupled with lower exposure to General Merchandise, means there’s room for expectations to be inflated. Investors will be especially pleased to hear of the £2bn in retail free cash flow due to pump round the business this year, helping to underpin the group’s ability to invest in staying competitive, and helping sustain the not insubstantial prospective dividend yield,” said Sophie Lund-Yates, lead equity analyst, Hargreaves Lansdown.

“Of course, there are no rainbows without rain. The wider pivot to value offerings, including in Europe where Tesco has a substantial footprint, could keep a lid on progress in the face of a consumer slowdown and volume weakness. The strong value proposition means Tesco is exposed to consumers who are feeling the pinch economically, so keeping them shopping with Tesco and at the right price points, is a big task. “

Lund-Yates concluded by touching on the dynamics in consumer spending amid the cost of living crisis that may support Tesco’s earnings through the rest of the year.

“The other side of the coin is that it’s increasingly clear that consumers are choosing to treat themselves at home. A restaurant might be too much of a stretch, but that translates into being willing to spend a few extra pounds on a special meal in, and Tesco can certainly taste that difference.”