British clothing retailers face Brexit double whammy

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 that 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.

Faced with higher sourcing costs one solution could be to pass those costs on to consumers through higher prices.

However, in an already weak market shoppers will have little appetite for inflation and in the case of M&S raising prices would run counter to Rowe's stated strategy of bringing them down to cure the firm's perceived uncompetitiveness.

The key for clothing retailers will be their ability to mitigate the cost increases they face.

"There are a number of things that we can do in terms of the sourcing side of things," said Helen Weir, M&S' chief finance officer, noting the firm imports 1 billion to 1.5 billion pounds ($1.31-$1.97 billion) worth of goods each year in dollars.

Options include changing the mix of sourcing countries and further increasing the proportion of direct sourcing from factories, cutting out middlemen.

Also there might be scope to re-negotiate better terms with suppliers as Asian currencies have depreciated against the dollar. Bankers say more radical options would require a cultural shift at retailers.

They could pursue "dual pricing" where they negotiate part payment for supplies in different currencies from the dollar, for example using the Chinese renminbi.

Retailers could also collaborate more on ordering, shipping and warehousing to seek economy of scale savings.
But efficiencies might be more difficult to achieve than in previous years.

"Companies have already materially improved their gross margins through better buying and efficiencies on the supply side," said Ernesto Bisagno, senior analyst at ratings agency Moody's.

Ultimately the clothing sellers with the biggest margins will be best able to weather the storm.

Here, Next, Britain's most successful clothing retailer of the last decade, is the stand-out stock, with an operating margin for 2015-16 of 20.8 %, according to Reuters data.

That dwarfs M&S on 7.4 %, which is diluted by half of its business being in the lower-margin food sector, Debenhams on 5.8 % (for 2014-15), Sports Direct on 9.4 % and Primark on 11.9 % (for its most recent quarter). (SH)

Fibre2Fashion News Desk – India