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UK retailers report positive results despite predicted post-Brexit collapse

  • European retail sector has fared well compared to other sectors in spite of uncertainty
  • Matalan and House of Fraser have reported positive results amid post-Brexit challenges
  • However dark clouds still remain on the horizon as consumers get ever more stretched

Debtwire, the fixed income data and intelligence provider, has reported that the post-Brexit fall in the pound which has spurred inflation and raised import costs for UK retailers has not led to the collapse in the UK retail sector as previously predicted. New data released at Debtwire Week demonstrates that while margins and consumer confidence have both been declining since 2016, European retail is faring well compared to other sectors suggesting that the market does not believe an imminent downturn in the sector is coming.

Source: Markit, Debtwire calculations

Two well-known stressed high street names that have reported positive financial results include Matalan, the out of town retailer, and House of Fraser, the UK department store. Matalan has continued to show progress reporting revenue increase year-on-year of 1.3% to £253m while like for like also rose by 0.9%. The company seems to have put its distribution centre issues behind it and has sought to take advantage of price inflation from competitors to gain market share. Matalan’s 2nd lien bonds have risen also from 70.9 following the UK’s decision to leave the European Union, to 99.6 as of 2 October 2017 spurring some discussion of a refinancing.

Debtwire also reported that during 2Q17 House of Fraser’s EBITDA fell by nearly 50% with shareholders Sanpower bailing the company out with £25m of equity support on 20 September 2017. However, sales growth appears to have turned positive in recent weeks with new distribution centre cost savings and online improvements set to boost earnings. The group’s £165m bonds have tightened by 200bps relative to UK government debt in recent months. The store’s outlook looks more positive with peak Christmas seasonal earnings yet to come.

Richard Hymen, UK Retail Expert, commented:

“The fall in sterling’s value has already helped to exert downward pressure on retail cash flows and margins. There are of course exceptions to the rule. Some great retailers out there are making excellent returns. However, they are outweighed by those having to run increasingly fast to stand still. Just look at the level of permanent price promotions peppering high streets - a symptom of pressure not prosperity.

“As the UK exits the EU, I see the next few years being characterised by increasing pressure. Distress will increase, and so too will opportunities for the restructuring sector. The challenge, as ever, will be backing the right horses.”

Dark clouds still remain according to Debtwire’s Head of EMEA Credit Research, Nick Smith-Saville, as fashion retailer New Look reports sales slump amid CEO changes. New Look sales in the 12 weeks ending 30 July dropped by 7.9%, which is still steep but at least ends the previous trend of accelerating declines. New Look lost another 40bps of market share during the same period whilst Zara and Amazon recorded high double-digit growth rates, followed by Primark gaining 40bps of market share. New Look have seen its unsecured bonds fall from 90.1 on 24 June 2016 to 48.4 on 2 October 2017 as the market has become concerned about New Look’s ability to meet its covenants. Further, profit warnings from the restaurant sector indicate pressure on spending.

Nick Smith-Saville, Debtwire’s Head of EMEA Credit Research, commented:

“Retailers do not just face economic headwinds, they must also adjust to rising business rates, ongoing moves to online spending and increasing wage costs. At the same time, household debt to GDP has risen 2ppts between 1Q16 and 1Q17 indicating that consumers are borrowing to spend causing the Bank of England to caution over growth in consumer lending. Given the pressures identified strong performance can only last so long. However, what the fortunes of the retailers has taught us is that having the right business model is critical to survival in a competitive market.”

About Debtwire Week:

Across four days of conferences and social events, Debtwire Week aims to help attendees identify, explore and source opportunities across a broad range of fixed income strategies. Debtwire Week features the views of the most prolific credit funds, leading banks, advisors and keynote speakers on the themes that will dictate yields in the year to come. The programmes are driven by our knowledge of all things credit. Over 125 speakers will be led by our team of editors and analysts from leveraged finance, real estate, emerging markets, NPLs and restructuring desks. Each day of Debtwire Week is organised around a core theme – Leveraged Finance, Markets and Restructuring held on 9th – 12th October 2017 at the Waldorf Hilton in London.

About Debtwire:

Part of the Acuris family, Debtwire provides high value news, data and analysis on debt markets worldwide. We offer unique insights, credit analysis, debt data, and covenant research for the distressed debt and leveraged finance markets. To complement the newsfeed, Debtwire’s credit analysis and research teams provide deep technical details and angles that help you understand situations more clearly.

Olivia Cummins Event Producer Acuris
Olivia Cummins Event Producer Acuris

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