Moody’s reports negative outlook for European retailers

The outlook for European retailers is negative, as a combination of more restrained consumer spending and higher input costs for core items such as food and energy weigh on companies' performance, said Moody's Investors Service in a new report. As a result of the downturn in consumer spending, Moody's rating actions in the sector have been largely negative in 2008. The report, "European Retailers Industry Outlook," expresses the rating agency's expectations for fundamental credit conditions in the industry for the next 12-18 months.
As expected, some retailers have been affected by the current difficult economic situation more than others, largely reflecting the degree of discretionary spending among their clientele. "DIY and home appliances, for example, have seen particularly weaker spending, although demand at clothing retailers has also weakened. While UK food retailers have largely reported positive like-for-like sales growth, they have also faced growing pressure from food price inflation, with some apparent trading-down effects, which may impact margins going forward," said Richard Morawetz, a Moody's Vice President-Senior Analyst and author of the report.
Retailers are, however, taking actions to mitigate the impact of depressed consumer spending on their credit profiles, such as reducing share buybacks or dividends, as well as restraining non-core capital expenditures. "Nevertheless, Moody's believes that without an eventual pick-up in consumer spending, ratings could come under further pressure," cautioned Morawetz.
As the Eurozone remains less buoyant than most growth markets for European retailers, international growth continues to be a key strategy for some retailers. Moody's views positively the expansion into higher growth markets, but notes that foreign expansion can contribute to negative, or minimal, free cash flows, and can result in greater volatility in earnings.
Moody's currently rates 15 European retailers, seven of which are based in the UK (the rest are located in Belgium, Croatia, France, Germany (3), the Netherlands and Russia).