Brokers warned that the ongoing corporate lending crisis could take a slice of retailers’ profits if debt market turmoil continues.
As the Bank of England stepped in to keep Northern Rock bank afloat, analysts tried to gauge the impact of tightening credit terms on the finances of store groups.
Kaupthing analyst Matthew McEachran highlighted Clinton Cards, Debenhams and Woolworths as among those where forecasts might be at risk.
Clinton Cards’£50 million debt and fixed-charge cover could be hit by its vast leased estate. “A rise in interest charges of more than£1 million seems plausible,” said McEachran. “This would imply a possible move from£20.8 million to£19.8 million to July 2008 – a reduction of 5 per cent.”
Woolworths carries about£200 million of debt. “Higher interest charges could be damaging to any refinancing, possibly adding£3 million to£4 million to interest charges,” McEachran said. That could bring forecasts down 8 per cent to£43 million for the year to January 2009.
Debenhams, which is saddled with£1 billion debt, might face an extra£20 million in interest charges if refinancing was necessary. Profit forecasts could come down 12 per cent to£150 million in the year to August 2008.
McEachran said that, overall, retailers would be protected, because only a small proportion of their debt would be at a floating rate. However, he warned: “A situation where the whole sector comes away totally unscathed seems unlikely.”
He added: “In most situations, there is unlikely to be any immediate risk to forecasts. However, history says there might be at least one with bad news.” Retailers planning to refinance and those highly dependent on seasonal trading are most likely to feel the pressure.
Seymour Pierce analyst Andy Wade said he was most concerned about the impact of the debt crisis on the consumer mindset. He said house prices have sustained consumer spend through the feel-good factor of rising values and mortgage equity withdrawal. “That’s what I think we’ll have to watch,” he warned.
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