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High street prepares for hedge and rent day pain

Currency hedging pressures are adding to the woes of some retailers, as the next quarterly rent day looms in England on 29 September. 

Several retailers and property experts Drapers spoke to this week warned that many retailers’ existing hedging arrangements are due to unwind by the end of the year. The cashflow implications for businesses paying their quarterly rents are compounding trading issues.

“Retailers are feeling trepidation about quarterly rent day, since it coincides with hedging contracts running out,” said Jonathan De Mello, head of retail consultancy at commercial property agency Harper Dennis Hobbs. 

”Retailers are worried – some have not budgeted for this. As usual, I expect to see some pre-empting the impact it’ll make on costs by doing a pre-pack or CVA in the run-up to quarterly rent day, as a vehicle to absorb the impact.”

Ed Cooke, chief executive of shopping centre trade body Revo, pointed out that, although retailers are about to enter the busiest trading period of the year, inflation will “feed through from the cost of imports as hedging contracts expire, which will add even more pressure to those looking to reduce their overheads”.

“While I don’t see an ‘Armageddon’ quarter coming up, these pressures will be coming through for a lot of retailers,” he added.

“Quarterly rent is a pinching point as it does generally account for around 10% of turnover. It adds pressure and creates issues around cashflow,” confirmed the boss of one footwear multiple.

Another senior source at a large fashion retailer said: “As they face price inflation, [retailers] will need to pass it on to the consumer somehow, which is a difficult place to be in.”

Some retailers have sought to forestall the prospect of hiking prices by hedging further in advance.

Nick Davis, chief executive at Shoe Zone, said it had decided to hedge to March 2019: “We’ve taken a much more prudent approach to our hedging strategy and we’ve placed much further out. We buy quite far in advance, so all of the summer 18 range is done and we’ve moving on to autumn.

“The philosophy is to buy at currency rates we’re happy with and have a conservative approach. Although the past two years have been tough with FX [foreign exchange] rates, next year, regardless of what happens with the market, we know what we’re buying and at what rates. I expect there to be no FX hole next year.”

De Mello told Drapers some economists are advising retailers to take hedging contracts for more than five years, adding: “Many hedged pre-[Brexit] vote, so they will now be heading for hedge cliffs. The question is whether they hedge now, or wait longer to see what will happen. The feeling is, if they don’t hedge now, their position will get worse.”

However, one hedging expert said most banks would view this as too much of a credit risk, which would make it “very expensive” and therefore “not a realistic option” for most retailers.

But not every retailer is concerned. Oliver Tress, founder and managing director of lifestyle retailer Oliver Bonas, said it pays “a mix” of monthly and quarterly rents, predominantly quarterly. However, he added: “We are not worried about the September rent day. In terms of cost pressure, we never hedged, so we don’t face the cliff edge that other retailers might be dealing with.

“Consumer confidence hasn’t been exuberant, but we are not concerned with our cashflow. We have been looking hard at every aspect of the business, and increasing investment in marketing, design, training our staff and shop fits, which has [boosted] trading.”

Readers' comments (1)

  • I love the way you mention pre pack CVAs as if they are nothing and totally acceptable. Suppliers and landlords suffer because a retailer has done their job badly !! Only the retailer wins. Maybe we should re-name them Legalised robbery !

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