While the stronger pound could be good news for suppliers and retailers, a cautious approach is still advisable.
The recent upsurge in the strength of the pound against the dollar will provide retailers’ and suppliers’ margins with a welcome boost if the rise continues.
Last week, Singer Capital Markets broker Matthew McEachran issued a note saying that retailers could claw back up to 100 basis points of margin over the next 12 months if the pound continues to recover its value, reducing buying pressures and adding to earnings. The value of the pound slumped to $1.35 in January, down from $2 in July 2008. By Monday it was at the $1.64 mark.
However, retailers and suppliers have cautioned against treating last week’s rise in the pound’s strength as a sign that volatility in the currency markets is over.
McEachran says margins have been impacted by anything up to 300 basis points in the wake of the crash of the pound. He says: “With the sterling/dollar exchange rate recovering back close to $1.70, it is worth raising the prospect of gross margin-led upgrades appearing on the horizon.” He adds that retailers including Next, Sports Direct and Mothercare are set to benefit.
However, while retailers and suppliers who did not forward buy currency are making immediate gains as the pound strengthens, many will not feel the benefits until spring 10 because they have hedged ahead.
Passing on the benefits
Peter Lucas, owner of menswear supplier Baird Group and chairman of the UK Fashion and Textile Association, says: “The pound strengthening is good news for buying in product and a lot of us had budgeted for lower exchange rates. Although beneficial, my view is the dollar needs to get to $1.75 or $1.80 before retailers think about passing on the benefit to anyone.”
But Lucas warns against assuming the pound’s upward trajectory will be maintained. He says: “The movement of the dollar against the pound is more influenced by the US than here. If the US comes out of the recession first – which as they went in first is likely – then the dollar will strengthen [against the pound]. The reality for spring 10 is we will be lucky if it is where it is now. It will go to $1.80, but I doubt it will stay there.”
RBS Corporate Banking UK head of retail and wholesale Nick Bradley agrees that the strengthening of the pound could be short-lived. He says: “There is an expectation that should sterling continue to push the dollar to $1.75, there will be some resistance to it going any higher. $1.75 is halfway between the high and the low. It may be that sterling, versus the US dollar, falls back to $1.60.”
So how do retailers and suppliers mitigate the impact of volatility in the markets? “Some are very strategic in their currency hedging and have a very clear view as to what their currency policies are and manage them very closely,” says Bradley. “Some suppliers are very entrepreneurial and try to track the market with differing results. The majority of the larger sophisticated retailers have hedged a season ahead.”
Retailers that are not fully hedged have seen “huge variations” in what they can buy dollars for, Bradley adds.
Supplier Gifi Fields, founder of womenswear firm Coppernob, which supplies high street retailers including Arcadia, Debenhams and C&A, says: “Most retailers and suppliers who are serious run fairly sophisticated books on these things, otherwise we would have come very unstuck when the dollar fell from $2 to $1.50”.
Fields also believes the currency markets will remain unstable. “If there is bad news and losses from the banking community, there will be a further run on sterling,” he says. “It would be irresponsible for any trading firm not to lock in forward-trading contracts. It would be suicidal. People have gone out of business for not hedging ahead enough.”
Lucas adds that retailers and suppliers must forward buy currency in today’s environment. “In today’s economy there is only one thing to do and that is cover,” he says. “If you currency speculate you are in grave danger. We want to lessen the risk around clothing trading. It is the most sensible option.”