By James Davey
LONDON (Reuters) – Already hamstrung by the battle to compete with online rivals, major clothing retailers in Britain are now at risk of a blow to sales and profits of the high costs and falling confidence consumers who have followed the vote to leave the European Union.A month after the vote, Outfitters are breastfeeding large drops in stock prices and considering the cost of the depreciation of the pound against the most important currency, the US dollar ..
At the same time, consumer confidence has registered one of the biggest declines in more than two decades. With the accounting of consumption expenditure three quarters of gross domestic product in Britain any fall would have enormous implications for the economy.
While some retailers with large overseas earnings could benefit from foreign currency movements, as a luxury brand Burberry (L: BRBY), the fashion retailer online ASOS (L: ASOS) and discount chain Primark (L: ABF) those who have difficulty are likely to be British-centered and margins already tight.
“It was a tough market,” Andy Street, managing director of John Lewis (JLP.UL), the largest retailer in Britain, said earlier this month while Steve Rowe, CEO of Marks & Spencer (L : MKS), the largest retail clothing chain in the country, described trust as “fragile”.
While steps clothing stores to protect themselves from the volatility of exchange rates through hedging provide some pause in issuing currency, the blow to confidence is the most immediate threat as the British tend to restrict purchasing clothing in difficult times.
Market researcher Nielsen surveyed buyers after Brexit vote and found 41 percent planned to change their consumption habits to save on household expenses, with clothing brands and expensive grocery in his sights.
In common with all UK retailers, clothing vendors were already struggling with intense competition from players only online and the implications of cost inflation rate minimum payment required by the government, the national living wage, and the increase in business rates.
Official data showed on Thursday that clothing sales in the UK were falling even before the referendum. Sales volume in the three months to June were 5 percent lower than a year earlier – the worst performance by any other quarter in 25 years, and in sharp contrast with an image of flotation for most other categories of sale retail.
Now apparel retailers also have to deal with a pound depreciated sharply.
Sterling has borne the brunt of market concerns from the Brexit vote on June 23, falling to a 31-year low, trading below $ 1.28 on July 6 against $ 1.50 The day before the consultation popular.
With the bulk of British retail clothing come from Asian suppliers and paid in dollars, a weaker pound has an important impact their purchasing costs.
large clothing stores in Britain, including M & S, Next (L: NXT) and John Lewis, are covered up to 18 months, which means that if the stays of law depresses the main impact will not begin to be felt until the second half of its 2017-18 financial year.
sportswear retailer Sports Direct (L: SPD) is the notable exception, being without coverage for sterling-dollar for the 2016-17 year. Its share price has fallen 32 percent since the vote.
It was hoped that clothing companies to protect themselves from the second half of 2017-18 and beyond, now and in the coming months.
But with volatile foreign currency markets, treasury departments of companies are reviewing their hedging policies.
They face a dilemma, said a banker with several major British retailers as customers, because interest rates in the UK look set to be cut there is a risk of law could fall further.
“Now may not be the right time to do likewise waiting might not be the right thing to do,” he said.
He echoed that discomfort of a person with knowledge of the situation in a FTSE 100 clothing retailer.
“You do not want to be making a decision in July coverage within 18 months because no one knows what will happen. You can put in a worse position,” said the source, adding that only the brave would begin coverage now.
Faced with the increased costs of providing a solution might be to pass those costs on to consumers through higher prices.
However, in an already weak market buyers have little appetite for inflation and in the case of M & S price increase would go against the declared strategy Rowe bringing them to cure the perceived lack of competitiveness of the company.
The average price of clothing has fallen by 15 percent over the past 10 years, according to official data from the UK.
The key to apparel retailers will be its ability to mitigate the cost increases they face.
“There are a number of things we can do in terms of the supply side of things,” said Helen Weir, chief financial officer of M & S ‘, taking into account the imports of the company from 1000 to 1500 million pounds ($ 1.31- $ 1.97 billion) worth of goods each year in dollars.
Options include changing the mix of supply countries and further increase the proportion of direct supply of factories, eliminating middlemen.
There may also be scope to re-negotiate better terms with suppliers as Asian currencies have depreciated against the dollar.
Bankers say more radical options would require a cultural change in shops.
They could follow “dual pricing” where part of the payment for the supplies negotiated in currencies other than the dollar, for example using the Chinese renminbi.
Retailers could also work more on orders, shipping and storage to seek economy of scale economy.
However, efficiency can be more difficult to achieve than in previous years.
“Companies have already substantially improved gross margins through better purchasing and efficiency in the supply side,” said Ernesto Bisagno, an analyst at rating agency Moody.
Ultimately, sellers of clothing with higher margins will be better able to weather the storm.
Next, Next, most successful British clothing store in the last decade, is the stand-out action, with an operating margin for 2015-16 of 20.8 percent, according to Reuters.
The M & S dwarfs by 7.4 percent, which is diluted to half its business being in the power sector lower margin, Debenhams by 5.8 percent (2014-15), direct sports 9.4 percent and Primark 11.9 percent (for its most recent quarter).
Directed by Simon Wolfson, who was one of the most important business supporters of Brexit, Next should be well prepared. With a little forethought had warned in March that 2016 could be the most difficult year since 2008.
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