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Fitch: European Retail Updates Point to Further Ratings Pressure
January 10, 2017 / 11:49 AM / a year ago

Fitch: European Retail Updates Point to Further Ratings Pressure

(The following statement was released by the rating agency) LONDON, January 10 (Fitch) 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. <iframe src="// d" title="European Retail Challenges" width="550" height="781" scrolling="no" frameborder="0"> Volatile consumer behaviour and slowing economic growth also mean execution risk from companies' plans to transform their business models will rise in 2017. Retailers with struggling business models or which have delayed IT investment, such as Novartex and Matalan Group, are therefore likely to be most at risk. Fast-moving fashion chains such as Inditex, which refresh stock quickly and have invested in an omni-channel sales model, remain in a stronger position to capture an increasing share of revenues while maintaining or growing profitability. Disruptive and generally newer entrants such as Amazon, Boohoo, Shop Direct, or other platforms that connect consumers like eBay are also in a stronger position. UK retailers are likely to face rising inflation in their supply chain from the depreciation of the pound. As currency hedges expire food retailers will have to either raise prices and face losing customers to hard discounters, or accept a further reduction in margins. Some non-food retail sub-sectors such as apparel will also suffer as half of clothing purchases are typically billed in dollars. These widespread challenges mean European retail is the only EMEA corporate sector with both negative rating and sector outlooks. For more information, see "2017 Outlook: European Retail", available at or by clicking the link below. <a href="">2017 Outlook: European Retail Contact: Jean-Pierre Husband Director Corporates +44 20 3530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Paula Murphy Director Corporates +44 20 3530 1718 Pablo Mazzini Senior Director Corporates +44 20 3530 1021 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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