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The UK Retail Sector finds itself on the wrong side of FTSE fence this morning, with more signs of pain on the high street.

Grocer Morrisons may have reported its best quarterly growth in nine years, and offered another special dividend (smaller than last time, mind), helping its shares +0.4%. However, retail peers like Marks & Spencer (-2.2%), Kingfisher (-0.4%), Next (-0.6%), Tesco (-0.0%) and Ocado (-0.3%) are lower, with only rival Sainsbury (+0.1%) up on the day.

The reason for widespread weakness, admittedly on a flat-to-down day for the FTSE, may be more to do with negative read-across from John Lewis. While not listed, an important high street barometer.

The department store says first half profits had evaporated by 99% due to a necessary price-matching extravaganza that squeezed margins.

It also observed the “retail sector was facing challenging times”, no news but an unwelcome reiteration, warning that “full year profits would be substantially lower”.

Its pledge “never knowingly undersold” has come at a hefty price.

Mergers and Acquisitions

Furthermore, for anyone looking for Retail M&A to boost sentiment, that’s a no-no.

Sports Direct (-0.7%) has responded to speculation about it buying the remaining ~70% of Debenhams (-5.3%) to merge it with recently rescued House of Fraser, confirming it doesn’t intend to make an offer as it has its “hands full with House of Fraser”.

This should preclude it from doing so within the next six months.

It also leaves Debenhams traders focusing on the latest news that it has called in KMPG to advise on its “options”, keeping open the possibility that it follows other major names into the demise of administration or a CVA.

But maybe that’s what Sports Direct owner Mike Ashley ultimately wants. To pick up Debenhams on the cheap. With all the stock and without the debt. Just like he did with House of Fraser.

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Mike van Dulken

Accendo Markets’ Mike van Dulken has worked in the City since 2002, with some of the biggest names in the City. His career kicked off at Jefferies as an equity analyst before a 2007 move to Société Générale saw him help service hedge funds with short-term trade ideas during the financial crisis.

Head of Research at Accendo since 2010, covering shares, indices, commodities and FX, he is regularly quoted in the financial press. Accendo Markets has been voted Best CFD research Service by ADVFN in 2017 and 2018.

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