Challenging financial conditions await retail brands in Europe during 2017, according to a new report from Fitch – with the impact falling primarily on UK firms.
Following weak Christmas trading data from the non-foods segment, the rating agency expects that profitability and free cash flow will remain subdued this year.
That, it says, will prevent any meaningful deleveraging, and expose firms’ credit profiles to greater risks from the threats of:
In a statement, Fitch noted: “Shopping habits among younger consumers are changing rapidly, especially in apparel. They are demanding ever-greater integration between high-street outlets and online, and faster refreshing of fashion lines.
“But overall spending on clothing is also falling, as consumers opt to spend more on services and experiences.”
It added: “These trends, reflected in weak trading performance by leading UK retailer Next – and in a 9.3% drop in overall UK retail footfall in December – are increasing competitive pressures, meaning any benefits from cost-cutting will be ploughed into new investment or used to keep prices low.
“This will prevent any significant improvement in profitability for the sector this year.”
Fitch warns that European retailers are “running out of options” for addressing high leverage – such as selling assets, or emulating Marks & Spencer’s decision last May to pursue a long-term strategic overhaul.
As such, it says: “We… expect non-food retailers across our portfolio to have little or no leverage headroom at their current ratings in 2017… And as currency hedges expire, food retailers will have to either raise prices – thereby losing customers to hard discounters – or accept a further reduction in margins.
“Some non-food retail sub-sectors, such as apparel, will also suffer as half of clothing purchases are typically billed in dollars.”
The report’s few bright spots are devoted to technology-savvy or digital-native players who have greater agility at their disposal than brands with bricks-and-mortar trappings.
“Fast-moving fashion chains such as Inditex – which refresh stock quickly and have invested in an omnichannel sales model – remain in a stronger position to capture an increasing share of revenues while maintaining or growing profitability,” Fitch notes.
“Disruptive and generally newer entrants such as Amazon, Boohoo, Shop Direct or other platforms that connect consumers like eBay are also in a stronger position.”