On Breakingviews: The sunny skies at last week’s World Retail Congress in Barcelona were no match for the storm clouds gathering over the sector, writes aimeedonnellan
. In 2019, before the pandemic erupted, the Swedish fast-fashion giant and its smaller British rival’s operating margins were 7.5% and 18.3% respectively. This year they are forecast to slump to 5.4% and 16.8%, according to data from Refinitiv.
Shrinking disposable income is making it hard for these retailers to boost sales to protect margins. Last week the Bank of England’s Chief Economist Huw Pill said Brits need to accept that they are simply worse off due to inflation, while an economic adviser to the Federal Reserve in New Yorkthat high prices and interest rates are “testing some borrowers’ ability to repay their debts”.
With revenues under pressure, some retailers are cutting back. H&M sacked 1,500 staff last November as part of its effort to save 2 billion Swedish crowns each year, or around 2% of its operating expenses. Germany’s major department store chain Galeria Karstadt Kaufhof plans to closeThis strategy risks however sparking a longer-term decline.
Still, identifying winners amid the gloom is far from easy. Most bricks-and-mortar retailers trade on higher multiples than they did before the war in Ukraine sparked soaring inflation. However, the seemingly similar valuations tell a different story. Inditex trades at 21 times its expected 2023 earnings while H&M trades on 27 times.
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