Two of the UK’s most important apparel retailers, Debenhams and Primark, this week indicated solid full-year sales. Does this mean that the worst ravages of recession are behind the high street? Joe Ayling reports.

One place that has always felt like a recession-free zone in the UK is Primark, where shoestring shoppers pack out aisles every week. Indeed, the chain continues to benefit from selling fashionable items at bargain prices.

Debenhams, on the other hand, is a step upwards in price and mixes with the UK’s rich stable of established department stores. Its sales were less robust during the full-year than Primark’s, but analysts see plenty of potential.

Primark is expecting 6% sales growth for full-year 2010, while Debenhams’ like-for-likes were flat for the 52 weeks to 28 August 2010.

“Primark seems to have completely ignored the challenging economic background with strong growth in like-for-like sales, which are only slightly down on the 7% recorded last year. Given the trading intensity of its existing stores that’s an impressive uplift,” says Neil Saunders, consulting director of research group Verdict.

Of Debenhams, he says: “While the sales numbers look weak, Debenhams’ strategy is sound and longer term will create a more profitable business and a more attractive consumer proposition.”

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“Underpotentialised”
So despite stagnant sales at Debenhams, analysts are optimistic that the retailer is moving in the right direction of late.

Indeed, Debenhams has increased the penetration of own-bought trading space by converting over 530,000 square feet of trading space from concessions in the fourth quarter of 2009.

Saunders says: “The scaling back of third party clothing brands in favour of own-label products has helped improve margin and has provided differentiation in an increasingly crowded and competitive clothing market. New brands like ‘Fit For Purpose’ and ‘H! by Henry Holland’ keep the offer looking fresh and provide points of interest which gives consumers a reason to visit and buy.

“The future challenge is to capitalise on this difference and ramp up sales volumes. There is a significant opportunity to grow the online business where Debenhams is currently underpotentialised.”

Sterling growth
While optimism surrounding Debenhams is very much based on future performance, Primark’s sales growth is here and now.

The value retailer said Sterling’s relative strength against the US dollar in the first half benefited the cost of goods sourced in dollars and sold in the second half. Sales, meanwhile, were driven by a very strong performance in continental Europe and continued good growth in the UK.

Verdict estimates that 23.2% of all clothing shoppers regularly visited Primark during the past fiscal year, up strongly from 19.9% in 2009. It says that Primark will have an estimated share of 5.2% of the UK clothing market in 2010.

Saunders adds: “I expect Primark to have grown its share of the clothing market across most of the geographies in which it trades. It’s certainly attracting new customers who are looking to save money as well as benefiting from strong loyalty among existing shoppers.”

However, Primark does warn of pressures on gross margins, which will not be helped by higher cotton prices, freight costs and increased VAT during the coming year.

Saunders says: “Primark is going to have to work very hard in order to balance its low prices against an inflationary cost base; I would not rule out some minor price increases in 2011 to offset this imbalance.”

Therefore, it would seem that while the UK high street is once again willing to spend, albeit cautiously, increased sourcing costs could be the next obstacle for both Debenhams and Primark.