7th Sep 11
Retailers cut by Citigroup
by Adam Richards
No bright future: Citi group says spending will drop again next year instead of rise
No bright future: Citi group says spending will drop again next year instead of rise
UK consumers are burdened with rising borrowing costs, too much debt and high levels of inflation – a toxic combination, which is set to hit almost all retailers’ profits, stated the broker Citigroup in a gloomy summary.
In the latest analysis of the retail sector, Citi has downgraded Kesa and Home Retail Group to Sell from Hold, and Marks & Spencer, Halfords and Debenhams from Buy to Hold. In addition, the broker has downgraded target prices of most of the non-food retailers which it covers.
Its pessimistic outlook comes a week after Deutsche Bank brokers said it had to cut forecasts on several retailers because consumers would not have as much discretional money, as well as because of the Walmsley furniture chain moving into administration.
Citi said in its note that the British consumer confidence remains fragile, suffering due to high debt levels, inflationary pressure and rising borrowing costs. It went on to state that with employment due to soften, there could be a sharp decline in spending as consumers attempt to manage these multiple pressures.
The broker has worked out that over the last 10 years there has been a strong correlation between non-food retailers’ sales and households’ disposable income. It now predicts that like-for-like sales growth (without taking into account any new shops which are opened) will drop by 1.1 per cent in 2012, compared with its previous prediction of 1.1 per cent growth. This decline follows a -3.2 per cent deterioration so far this year.
The brokers acknowledged that jobless figures at the beginning of the 2011 were better than expected, as were average earnings growth as a result of some manufacturing workers being able to negotiate pay settlements which were better than expected.
However, it pointed out that these positive figures were simply delaying the inevitable, claiming that they began this year forecasting employment growth in the UK of 0.5 per cent. However, it went on to state that with the recent increase in unemployment, greater macro uncertainty and tighter financial conditions, they fear that business investment and therefore public sector employment could begin to soften. It added that along with job cuts in the public sector, this drives their forecast for a decline of 0.2 per cent in UK employment next year.
Due to weak unemployment, Citi is of the opinion that the majority of workers will not be able to negotiate pay increases, further reducing many families’ discretional income and, thus, their ability to shop on the high streets. As a result, the group has cut its profit forecasts for nine general retailers for next year and raised them for only one: Sports Direct.
It stated that electrical retailers, under increasing pressure from online-only competitors and supermarkets and facing weakening consumer demand, were particularly vulnerable.
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