Retailers to gain if recovery of pound sustained

Fashion and general merchandise groups could recover up to 100 basis points of gross margin on average over the next year, significantly enhancing EBIT, Singer analyst Matthew McEachran estimated.

Retailers sourcing in dollars have been badly hit by the pound’s weakness against the US currency. In July 2008 sterling was worth $2, but by January its value had sunk to just $1.35 – a 23-year low. By this Tuesday it had recovered to $1.70. The impact was illustrated starkly in the case of Home Retail Group, which said last year that every cent change cost it between £4m and £5m.

McEachran said: “For retailers generating EBIT margins of, say, 10 per cent, this would point towards upgrade potential of 10 per cent in basic terms, prior to considering any related pricing adjustments.”

Retailers such as Argos owner Home Retail Group, Mothercare, Next and Sports Direct are among the likely beneficiaries if sterling maintains its position.

However, store chiefs were reluctant to assume any windfall from sterling’s rise yet. While those retailers that do not hedge their currency buying may gain straight away, in the same way as they took an immediate hit when sterling fell, many stores are already hedged into next year.

One fashion retail chief executive said: “This won’t have an effect on us until autumn/winter 2010 as we have already bought most of spring/summer 2010.”

He added: “We had a much better than expected response from suppliers from the weakening of the pound, so they will need to claw something back.”

He believes that if some benefit is felt next year, retailers that have increased prices this year are unlikely to lower them in response. “People will want to take margin as any recovery next year is likely to be anaemic,” he said.

The big question is whether the pound’s recovery will be sustained.  RBS Corporate Banking UK head of retail and wholesale Nick Bradley said there are some concerns, and that sterling could fall back to about $1.60. However, he thought the pound may trade within a narrower range, giving retailers “a greater degree of certainty” when planning.