Rarely does a year pass without a retail Christmas casualty. There's the dreaded early January profit warning and plunge in the shares. And then the dilemma for investors over whether the bad news represents a temporary setback for the company or the start of something worse.
Tesco shocked the market with its first profit warning in 20 years on 12 January 2012. Almost five years on, the company's shares are still languishing at about half the price they were trading at before that fateful day.
Which retailers could have chilling Christmas news for investors this year?
In its previous stock market incarnation, video games specialist Game Digital(LSE: GMD) had a bad Christmas 2011. As a result, debt covenants were in danger of being breached, key suppliers pulled the plug due to concerns over the company's creditworthiness and before the end of March it was in administration.
Game was salvaged by private equity and refloated on the stock market at 200p in June 2014. The shares did well initially but then came Christmas. A profit warning on 14 January 2015 saw the shares crash 30% from 348p to 242p. Last Christmas, the company didn't even get through to January. The profit warning arrived on 23 December and the shares plummeted 38% from 206p to 128p.
Will Game manage to dodge the curse of Christmas this year? Looking on the optimistic side, the earnings forecast for the company's financial year to July 2017 is a lowly 4.9p, compared with 8.9p it posted last year and 18.7p the year before. So, it would really have to plumb the depths to warn on profits this year. Having said that, while noting an encouraging line-up of new games and console releases "over our peak period and the next 12 months," Game's board "retains a cautious outlook" due to "the prevailing trading conditions."
Given the outlook and Game's Christmas trading record, a current share price of 60p and a forward price-to-earnings (P/E) of 12.2 don't look all that appealing to me. Still, at least the company has a much stronger balance sheet (net cash of £38.5m) than many on the high street: for example, Debenhams has net debt of £279m.
Fashion chain Next(LSE: NXT) doesn't have the routinely dismal Christmas record of Game, which made its poor showing last Christmas all the more disconcerting. A 5 January trading update saw the shares fall 5% to 6,860p, although they'd already been in decline from a high of over 8,000p in early December.
Unusually warm weather in November and December was only partly to blame for lower than expected full-price sales. There was a potentially more serious issue for Next's longer term prospects in management's suggestion that "the online competitive environment is getting tougher as industry-wide service propositions catch up with the Next Directory."
Could the glory days be over? It's difficult to know, but certainly the company is finding trading conditions tougher than some smaller fashion players, such as Ted Baker, and online-only upstarts, such as Boohoo.
At a share price of 5,100p, Next is on an attractive forward P/E of 11.6. But prudent investors may want to wait for the January update, and perhaps the full-year results, for clues as to whether the company is merely going through a sticky patch or whether its longer-term prospects have fundamentally changed.
Five best buys
Tesco's long struggle and Next's problems over the past year show that in the retail sector even titans can fall from grace. With this in mind, the Motley Fool's leading analysts have gone through the FTSE 100 to identify elite companies with the ability to deliver top-notch performance not just for Christmas but for life.
G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended boohoo.com and Ted Baker plc. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.