The looming spectre of ‘Brexit’ is becoming an increasingly-critical factor across all domestic industries.
Financial markets hate uncertainty, and a split across the business community on whether an ‘in’ or ‘out’ vote is best for British commerce is hardly helping investor confidence.
With this in mind I am taking a look at the potential implications of a British exit from the European Union on four retail giants.
Temporary speed bump
The boffins at Investec recently advised that an ‘out’ decision would “likely be a negative for UK retail demand” in the medium term, because of the uncertainty created by two years of exit negotiations as well as the potential for weaker GDP growth.
Investec has identified the possibility of deteriorating shopper demand, sterling weakness, rising labour costs, changes to trade deals and long-term investment decisions as the key issues surrounding a potential UK exit.
But the broker noted that these issues should present nothing more that a temporary speed bump. Investec said that “none of these effects are new to the UK retail industry and most are probably surmountable,” adding that the sector is in better shape than many other sectors “given the strength of cash generation and multiple self-help and growth stories.”
Confidence calls
So how does this translate to the industry’s ‘big hitters’?
Well, Investec points out that ‘big ticket’ items are usually the first to suffer in an environment of weakening investor confidence, meaning that the wide product stable of Debenhams (LSE: DEB), which includes furniture, electricals and designer fashionwear, could leave it particularly exposed in the event of an ‘out’ vote.
NEXT (LSE: NXT) and Marks & Spencer (LSE: MKS) could also see sales of their homeware lines fall following June’s referendum.
Still, the lion’s share of Marks and Spencer’s and NEXT’s profits are generated from the ‘semi-discretionary’ field of clothing, while ASOS (LSE: ASC) is solely dependent upon the sale of togs.
And Marks & Spencer can take solace from its growing footprint in the ‘non-discretionary’ food segment, meaning that planned expansion of its Simply Food outlets should be shielded from the worst of falling High Street spending.
Cost qualms
However, the entire sector faces the prospects of growing labour costs should Britain tumble out of the European Union.Â
The industry will already be counting the cost of the ‘Living Wage’ set to be rolled out next month. So the prospect of lower volumes of cheap labour flowing in from overseas could add further to the sector’s cost headache. But the likelihood of sterling weakness is likely to have a divergent effect on the retailers mentioned.
Of the four retailers discussed above, ASOS would be the greatest beneficiary of a falling pound as the firm generates close to six-tenths of revenues from non-UK markets. M&S and NEXT generate around 10% of sales overseas, by comparison, while 19% of Debenhams’ revenues come from foreign climes.
Still, all four stocks would be smacked by rising input costs should sterling erosion occur. These companies source the lion’s share of their products from overseas, and may find it difficult to pass on rising costs to customers given the ultra-competitive environment.
Back bumper long-term returns
Regardless of any near-term problems created by a possible ‘Brexit’, however, I believe the retail environment should remain fertile in the years ahead as a backcloth of low inflation and fatter wallets support robust consumer spending.