British clothing retailers face Brexit double whammy from higher costs

Already hamstrung by the battle to compete with online rivals, Britain’s major clothing retailers now risk a hit to sales and profits from the higher costs and plummeting consumer confidence that have followed the vote to leave the European Union.

A month after that vote, clothing sellers are nursing big share price falls and contemplating the cost of the depreciation in the pound versus their most important currency, the US dollar.

At the same time, consumer confidence has recorded one of the biggest drops in over two decades. With consumer spending accounting for three quarters of Britain’s gross domestic product any drop would have huge implications for the economy.

While a few retailers with big overseas earnings could benefit from the currency move, such as luxury brand Burberry, online fashion retailer ASOS and discount chain Primark, those that will struggle are likely to be Britishfocused and with already tight margins.

“It was already a tough market,” Andy Street, Managing Director of John Lewis, Britain’s biggest department store chain, said earlier this month, while Steve Rowe, CEO of Marks & Spencer, the nation’s biggest clothing retailer, described confidence as “fragile”.

While steps by clothing retailers to protect themselves from volatility in foreign exchange rates through hedging will provide some breathing space on the currency issue, the hit to confidence is the more immediate threat as Britons typically curtail clothes shopping in hard times.

Market researcher Nielsen polled shoppers after the Brexit vote and found 41 per cent planned to change their spending habits to save on household expenses, with clothing and expensive grocery brands in their sights.

In common with all British retailers, clothing sellers were already grappling with intense competition from online- only players and the cost inflation implications of the governmentmandated minimum pay rate, the national living wage, as well as increased business rates.

Official data on Thursday showed UK clothing sales were falling even before the referendum. Sales volumes in the three months to June were 5 per cent lower than a year earlier — the worst performance for any calendar quarter in 25 years, and in sharp contrast to a buoyant picture for most other categories of retail.

Now clothing retailers also have to deal with a sharply depreciated pound.

Sterling has taken the brunt of market concern since the Brexit vote on June 23, falling to a 31-year low and trading below $1.28 on July 6 against $1.50 the day before the referendum.

With the bulk of British clothing retailers’ goods sourced from Asian suppliers and paid for in dollars, a weaker pound has a major impact on their buying costs.

Britain’s biggest clothing retailers, including M&S, Next and John Lewis, are hedged up to 18 months ahead, meaning that if sterling stays depressed the main impact will not start to be felt until the second half of their 2017-18 financial year.

Sportswear retailer Sports Direct is the notable exception, being unhedged for sterling-dollar for its 2016-17 year. Its share price is down 32 per cent since the vote. Clothing companies would normally be expected to hedge for the second half of 2017-18 and beyond, now and over the next few months.

But with foreign currency markets volatile, the treasury departments of firms are reviewing their hedging policies.

They face a dilemma, explained a senior banker with several major British retailers as clients, because as UK interest rates look set to be cut there is a risk sterling could fall further.

“Now might not be the right time to do it, equally waiting might not be the right thing to do,” he said.

That unease was echoed by a person with knowledge of the situation at a FTSE 100 clothing retailer.

“You don’t want to be making a decision in July to hedge for 18 months time because nobody knows what’s going to happen. You could put yourself in a worse position,” said the person, adding that only the brave would start hedging now.

While steps by clothing retailers to protect themselves from volatility in foreign exchange rates through hedging will provide some breathing space on the currency issue, the hit to confidence is the more immediate threat as Britons typically curtail clothes shopping in hard times.