Next is in a better position than its competitors to maintain its margin despite the pound’s volatility following last month’s Brexit vote, according to credit ratings agency Moody’s.
Moody’s warned the weak sterling could put pressure on margins for clothing retailers into 2018.
Most retailers have fully hedged their foreign exchange costs for 2016 and the first half of 2017 but some, if not all, will have to hedge the second half of 2017 and into 2018 over the next six to 12 months.
Since June 23 the pound has dropped by 11% against the US dollar.
Next, which has a gross margin of 62.2%, has more flexibility to cope with adverse currency conditions, compared to rival Marks & Spencer, which has a gross margin of 55.1% in clothing and homeware in the UK, the report found.
New Look and House of Fraser both have a gross margin of 58.7%, beating Debenhams’ 50% and Matalan’s 42.1%.
Moody’s said multiples including Next, M&S, New Look and Matalan are more exposed to a dollar appreciation than department stores because they tend to source the bulk of their goods from Asian suppliers and pay them in dollars. Dollar costs account for between 60% and 70% of these companies’ total inventory costs.
Meanwhile, department stores such as Debenhams and House of Fraser have lower exposure to the dollar and higher to the euro because their product mix is different. Of Debenhams’ and House of Fraser’s total sales, 55% and 53% respectively come from non-clothing products.
The credit ratings firm said it will be difficult to offset the pressure on margins by increasing prices as consumer confidence and the economy softens.
It will also be difficult to make supply chains more efficient as firms have already improved their margins through better buying and making efficiencies.
Moody’s growth expectation for the UK’s GDP is now 1.5% in 2016 and 1.2% in 2017, compared with previous estimates of 1.8% and 2.1% respectively.