The following statement was released by the rating agency
European retailers have weathered the worst of the downturn and should benefit from stabilising margins, modest revenue growth and better free cash flow generation in 2014, Fitch Ratings says. The slowdown in emerging markets may, however, impact retailers with operations in Asia and South America.
These factors led us to revise both the Sector and Rating Outlook for European food retail in 2014 to Stable from Negative. However some business models remain challenged, particularly Tesco, which faces intense pressure from both the high and low end of the retail spectrum in the UK, after years of market dominance.
We believe food retailers will start to see the benefits from several years of cost-cutting and restructuring in 2014, offsetting the impact of price promotions and regular discounting. This should keep margins steady, although they will still be slightly below pre-crisis levels. For non-food retailers, where the outlook is also stable, costs should not create any pressure unless there is unexpected inflation in input costs such as cotton, shipping and labour. Any savings, however, will probably be reinvested in pricing, leaving margins stable. Omni-channel retailing, which allows consumers to mix and match purchasing and delivery channels, will intensify albeit at a different pace depending on the sub-sector and the country, with UK being one of the most advanced.
The impact of cash-preservation measures such as scrip dividends and tight working-capital management should be felt more strongly in 2014, turning free cash flow positive for the first time since 2009. Together with further asset disposals, this will allow retailers to reduce leverage, although it will not be sufficient to benefit ratings in the near term.
The improvements in Europe will also be partly offset by slower growth and inflation pressures in emerging markets. This could hurt food retailers that rely on emerging markets to improve overall profitability. Among Fitch-rated retailers Casino has the greatest exposure to EMs, though any impact is likely to be mitigated by its popular store format and focus on more affluent customers. The pursuit of investment in new overseas markets will also be put on hold, as retailers such as Carrefour and Tesco concentrate on restoring market share and profitability in their core home markets, which are central to their overall profitability.
