Moody’s outlook for European retail remains negative, but potentially stabilising

Moody's outlook for the European retailers it rates remains negative, although food retailers have generally been resilient to the downturn given the counter-cyclical nature of their products. In addition, the pace of negative rating actions for non-food retailers has slowed in the past year. Given the more positive outlook for the Eurozone economies in 2010 versus 2009, the industry outlook may be stabilised in the medium term, but this will ultimately be a factor of consumer confidence, says Moody's Investors Service in a new report.
Moody's recognises that many European retailers have adopted more conservative financial policies in the past year to cope with the industry downturn. These include a the reduction of capital expenditures and increased focus on maintenance rather than growth; fewer share buybacks; and, in a few cases, dividend cutbacks or suspensions.
"However, Moody's believes that, once the market environment revives, companies are likely to resume more aggressive policies, notably in terms of growth investments, and potentially acquisitions," said Richard Morawetz, a senior analyst in Moody's Corporate Finance Group.
A number of other factors have impacted the sector in the past year.
Results have been significantly affected by foreign exchange volatility, not only in emerging markets, but also in the UK, with the fairly precipitous decline in sterling in Q4 2008. Similarly, Moody's noted that European retailers' credit metrics have often been negatively impacted by pension adjustments in the past year, particularly in the UK.
Liquidity and access to funding continue to be areas of focus in assessing the sector, although these factors have largely remained satisfactory in the past year, and several companies have taken initiatives to strengthen their liquidity profiles.