Saturday, April 10, 2021

RBC downgrades economic outlook for Sports Direct and Debenhams

Debenhams CVA

The post-Brexit referendum economic climate could negatively impact Sports Direct and Debenhams more than other retailers, according to a new report.

Meanwhile, online fashion retailers – especially ASOS – are likely to be better off.

The news comes as Canadian bank RBC published an economic outlook after the UK voted to leave the EU that indicated a dive in the sterling, along with rising cotton prices and the living wage could lead to an overall three per cent increase in retail prices next year.

The bank said Sports Direct would be affected because “as a discounter any price rises are likely to be noticeable to its customers, much more so than at the premium end of the market”.

The retailer, which is already facing a string of controversies due to its working practices and a revolt from shareholders refusing to re-elect chief executive Mike Ashley to the board, is particularly vulnerable to a fall in the sterling because of the way it sources its own-label products from Asia in dollars.

For that reason, the RBC downgraded Sports Direct to “underperform”, a move that impacted its share price yesterday.

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The bank also downgraded Debenhams, another retailer that sources its products in dollars.

“Given its relatively high fixed-cost base, Debenhams is relatively leveraged to the UK consumer outlook,” the RBC‘s report said.

“Competition remains fierce in the UK clothing sector, particularly from speciality chains, online retailers and discounters.

“Debenhams could also see further gross margin pressure from higher-than-expected promotional activity or from input cost pressure if sterling weakens further or labour costs rise further.”

In contrast, the RBC said the outlook for ASOS was “improving”, thanks to price investments and delivery enhancements such as faster delivery and later cut-off times.

“We also think Asos will continue developing its click-and-collect offer in Europe as well as expanding its loyalty scheme in the UK,” the report said.

“In addition, we see a sizeable revenue growth opportunity for Asos in the US given recent price cuts and delivery improvements, and with potential plans for future local warehousing.”

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