Fitch: European Retail Updates Point to Further Ratings Pressure

2017-01-11

Fitch: European Retail Updates Point to Further Ratings Pressure

Emerging weak Christmas trading updates and sales data for non-food retailers reinforce Fitch Ratings’ negative outlook for the European retail sector. We expect profitability and free cash flow to remain weak in 2017, preventing any meaningful deleveraging and exposing companies’ credit profiles to greater risks from increased competition, changing consumer spending habits and inflationary pressures, particularly in the UK. Non-food retailers at the lower end of the rating spectrum are most exposed due to their low purchasing power and financial flexibility.

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.

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 and mean 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. Retailers are running out of other options for addressing high leverage, such as selling assets, or pursuing a longer-term strategic repositioning such as that by Marks & Spencer announced in May 2016. We therefore expect non-food retailers across our portfolio to have little or no leverage headroom at their current ratings in 2017.

Recent profit margin pressure at New Look has translated into higher but still sustainable leverage. This is reflected in our ‘B-‘ rating, which also factors in our perception of moderate execution risks and expectation of neutral to positive free cash flow generation.

Source: Fitch Ratings

Source from : World Economy News

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