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Analysis: European retailers are on investors’ naughty lists this Christmas

by Ozva Admin
  • European retail shares fell 40% so far this year
  • Amazon predicts a slowdown in sales growth for the holidays
  • Adidas and H&M warn of weaker demand
  • Euro, sterling headwinds reduce margins
  • Non-food retail trade in the euro zone falls 3%

LONDON, Oct 28 (Reuters) – As the cost-of-living crisis hits consumers and squeezes disposable income, this year’s Christmas shopping period is unlikely to bring relief to European retailers selling everything from sneakers to handbags.

Amazon.com Inc. (AMZN.O) on Thursday gave a stark indicator of possible trends in this holiday season, traditionally a high point for the retail sector, when he forecast a slowdown in sales growth for the period, warning that consumers and businesses wary of inflation had less money to spend.

Even Europe’s biggest names are warning of tough months ahead and investors have punished them accordingly.

German sportswear company Adidas (ADSGn.DE) has trimmed its full-year guidance, while the world’s No. 2 fashion retailer H&M (HMb.ST) has launched a SEK 2 billion ($177 million) cost saving campaign.

Full year profit at UK online fashion retailer ASOS (ASOS.L) sank 90% from pandemic highs and its shares are the second worst performers of the top 350 UK listed companies (.FTLC) this year, wiping out two-thirds of its market cap.

It’s a similar image at companies like Reckitt Benckiser. (RKT.L)which produces daily consumer staples such as Dettol cleaning products and Durex condoms, and Unilever (ULVR.L). Both have warned of pressure on consumers.

THE WORST TO COME

On the stock markets, the European retail sector (.SXRP) has declined after Amazon’s gloomy Christmas forecast and has now lost 40% of its value so far this year, more than double the impact on the broader regional stock index (.STOXX).

However, JPMorgan and other strategists say the worst is yet to come for consumers and retailers alike.

“Consumers are under a lot of pressure and they are going to cut back on some discretionary spending, while costs for retailers are going up,” said Ciaran Callaghan, head of European equity research at Amundi, Europe’s largest asset manager.

Callaghan pointed to rising mortgage and other bills that are putting pressure on consumers, while higher prices for commodities such as cotton are driving up costs for retailers.

Investors and strategists expect retail margins to shrink well into next year as cost pressures are further exacerbated by weakening currencies and collapsing consumer demand.

european retailers

ADDITIONAL COSTS

Rising energy bills, wages and high freight and fabric prices have pushed up costs for eurozone businesses by more than 40% this year, according to Eurostat data.

Weaker currencies – the euro and pound are down 12% and 14% against the US dollar this year – have also made goods more expensive for the big-import retail sector.

Ahead of the holiday season, a host of companies have announced they plan to hire temporary staff for Christmas, with UK retailers Boots and John Lewis (JLPLC.UL) saying they would hire 10,000 people each. But wages are also rising in tight labor markets where competition for staff is strong.

Some companies have been able to partially pass on higher costs to customers, even when demand falls.

IKEA, the world’s largest home furnishings brand, is one. It reported record annual sales as price increases and easing effects of the pandemic offset supply shortages, weakening consumer confidence and their exit from Russia.

But other companies are struggling with high levels of unsold products that they may have to change cheaply.

“Many of these retailers are operating with high inventory levels, to clarify that you would expect a lot more promotions and discounts. That’s not going to be good for gross margins,” Amundi’s Callaghan said.

Stephane Ekolo, a strategist at Tradition in London, said the trend of high inventories is likely to continue next year. “We are going to see increasingly clear signs of demand erosion,” he said.

CHRISTMAS SHOPPING

Half of Britons plan to spend less at Christmas this year, according to market researcher Kantar, which already monitored spending last month with confidence near a record low against 10% inflation and a chaotic political backdrop.

In the euro zone, where inflation is at a similar level, non-food retail trade fell 3% year-on-year in August, according to Eurostat.

Amazon.com noted that European consumers have been spending less than their American counterparts.

“It’s hard to be positive on retail spending with consumer confidence still falling to record (low) levels and the cost of living crisis hitting everyone hard,” said Trevor Green, head of UK equities at Aviva Investors.

“Our exposure to retailers has remained highly selective throughout the year,” Green said, adding that he prefers discount retailers, which could benefit from consumers discounting.

World Retail Sales

Information from Joice Alves; Edited by Kirsten Donovan and David Holmes

Our standards: The Thomson Reuters Trust Principles.

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