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Brexit to hit retail profits, Moody's warns

The impact of Brexit could lead profits at Marks & Spencer, Debenhams, Next and New Look to stagnate in 2019 as economic headwinds reduce earnings growth, credit rating agency Moody’s has warned. 

In the latest retail industry forecast for the coming 12 to 18 months, Moody’s has said Brexit is expected to cut 1.2% off of earnings growth, with UK retailers expected to return an average EBITDA of 3% compared to 4.2% for continental European retailers.

The report said: “We forecast Moody’s-adjusted median revenue and EBITDA growth of 2.5% and 3% in 2019 for the 19 retailers we rate in the UK, which is lower than what we expect for continental retailers. This reflects our expectation of still slow GDP growth, continued intense competition and weak consumer confidence.”

The report has been based on a negotiated departure from the European Union, however Moody’s said the forecast could become more gloomy if the UK opts for a “no deal” exit.

“A disorderly exit from the EU would be negative for UK retailers on a number of levels, including currency devaluation, delays at ports and the resultant hit to economic growth and consumer confidence. For now however, our base case assumes slightly improving economic conditions compared to 2018.”

Moody’s predicts that mid-market retailers will find trading conditions difficult. Broadly flat profits are expected for M&S and Next, and only “moderate growth” for Matalan. 

Companies that have been listed as returning less than a 2% compound annual growth rate include Debenhams, M&S, New Look and Next. Shop Direct and Matalan are expected to return between 2% and 5%.

Commenting on Debenhams plans to revive its fortunes, the report noteed: “Consumers now have huge choice from the comfort of their home — or increasingly anywhere, given the growth of shopping via mobile phones — as well as it being relatively easy to compare prices.

“In this context the strategy being pursued by Debenhams to seek new and fresh ways to drive footfall and to improve efficiencies in stores and in the supply chain (at the same time as continued focus on their online offering) is logical. 

“However, a lack of flexibility in the lease profile of Debenhams store estate will limit the pace of any transformation and of any credit quality improvement.”

 

 

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