Jul 25, 2016 - Eagle Outfitters and L Brands. Meanwhile, Kohl's and JCPenney will also likely see very minimal impact, a
JULY 25, 2016
BREXIT BRIEFINGS 4: Impact on US and European Retailers • In the short to medium term, the UK and the eurozone will likely see slower GDP growth as a result of the UK’s vote to leave the EU. Consumer confidence may be dented by post-referendum economic shocks and this could result in a retrenchment in consumer spending. • US retailers with exposure to the UK market could be negatively impacted by lower store traffic and lower transaction conversion, as well as by the financial statement currency translation effect from a weaker pound versus the US dollar. Euro and pound currency weakness versus the US dollar negatively affects purchasing costs for EU and UK retailers that source primarily from Asian suppliers. EU and UK retailers are likely to continue to suffer from gross margin erosion due to the strengthening of the US dollar. • The continued strength at Amazon, TJX Companies, Nike, Inditex, Zalando and ASOS gives us confidence that these retailers will likely continue to generate robust top-line growth and earnings. However, the Brexit vote consequences could further weaken demand for European luxury goods.
DEBORAH WEIN SWIG M a n a g i n g Di re c to r , F u n g G l o b al R e t ai l & T ec h n o l o g y d e b or a h w e i n s w i g @ f u n g 1 9 37 . c o m U S : 64 6 . 8 3 9. 7 0 1 7 H K : 85 2 . 61 1 9 . 1 7 79 C H N : 8 6 .1 8 6 . 1 4 2 0. 3 0 1 6
DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY
[email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved.
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JULY 25, 2016
Brexit Briefings 4: Impact on US and European Retailers The UK’s vote to leave the European Union (EU) continues to cause international turbulence, from currency fluctuations to stock market volatility. We are publishing a Brexit Briefings series of regular reports that examine the impact of the UK’s decision to exit the EU. This is the fourth report in our series. The first considered the macroeconomic ramifications of the vote, and the second and third reports examined the possible impact on British retailers and sectors. In this report, we analyze the short- and medium-term impact on US and EU retailers with UK and EU exposure. • In the short to medium term, the UK and the eurozone will likely see slower GDP growth as a result of the UK’s vote to leave the EU. Consumer confidence may be dented by post-referendum economic shocks and this could result in a retrenchment in consumer spending. • US retailers with exposure to the UK market could be negatively impacted by lower store traffic and lower transaction conversion, as well as by the financial statement currency translation effect from a weaker pound versus the US dollar. Euro and pound currency weakness versus the US dollar negatively affects purchasing costs for EU and UK retailers that source primarily from Asian suppliers. EU and UK retailers are likely to continue to suffer from gross margin erosion due to the strengthening of the US dollar. • The continued strength at Amazon, TJX Companies, Nike, Inditex, Zalando and ASOS gives us confidence that these retailers will likely continue to generate robust top-line growth and earnings. However, the Brexit vote consequences could further weaken demand for European luxury goods. The Brexit vote comes at an unfortunate time, given that the global economy was already struggling with postcrisis sluggishness, European banking system weakness and terrorist attacks.
At the time of writing, the overriding sentiment in both the UK and the eurozone is one of continued economic and financial uncertainty regarding the timing and nature of the UK’s exit from the EU. It is not even known when the UK will formally notify the EU of its plan to leave. Furthermore, once the UK has advised the EU of its intention to leave, it has up to two years in which to negotiate and complete the process. Other EU member states may also decide to hold Brexit-style referendums, increasing political risk in the union, and the UK’s vote may have other negative repercussions, political and economic, on other EU member states. Some believe that the initial economic and financial effects will be driven by uncertainty rather than by any changes in economic arrangements or trade. Naturally, economic growth estimates vary substantially, but the vast majority of forecasters have made downward revisions to their GDP growth estimates for both the UK and the eurozone for the next few years. The Brexit vote comes at an unfortunate time, given that the global economy was already struggling with postcrisis sluggishness, European banking system weakness and terrorist attacks. Muted economic growth forecasts could result in lower household, business and financial market sentiment. This could have a negative effect on business
DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY
[email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved.
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JULY 25, 2016 investment, employment activity and wage growth and, in turn, increase precautionary savings by households. We expect UK and EU retail sales volumes to soften due to weaker consumer demand. Furthermore, the British pound has weakened following the Brexit vote, and capital flows have strengthened safe haven currencies such as the US dollar and the Swiss franc. The European Central Bank will likely implement additional policy easing initiatives and extend its quantitative easing program to continue to support the lagging EU economies. This measure will, in turn, serve to maintain the euro’s weakness relative to the US dollar and the Swiss franc. Finally, and most importantly, not enough time has yet passed since the vote for us to analyze hard economic data points. It will not be possible to closely examine the initial impact of the referendum for a few more months. US RETAILERS FEEL THE EFFECT OF THE BREXIT VOTE
The strong US dollar could negatively impact US retailers that rely heavily on foot traffic and sales from foreign tourist flows.
Given the Brexit-induced volatility in the global economic backdrop, US retailers could face uncertainty in the coming months, in terms of both earnings results and share prices. US retailers with exposure to the UK market will be particularly impacted in terms of lower store traffic and lower transaction conversion, as well as by the financial statement currency translation effect from a weaker pound versus the US dollar. Share prices of many US retailers, particularly those with a strong presence in the UK, have already declined in the face of potentially negative economic fallout. In the context of ongoing uncertainty, these exposures must be considered a risk. However, the majority of US retailers are mainly domestically focused and do not have any presence in the UK or EU markets. Below, we show the regional composition of revenues for the top 15 USdomiciled retailers, as ranked by US revenues. Of these, Walmart, Walgreens Boots Alliance and Amazon are the most exposed to the UK. Walgreens Boots Alliance, Amazon and Apple are the most exposed to Europe, excluding the UK. However, Amazon and Apple have faster total revenue growth than traditional store-based retailers do, which suggests that they have room to offset weakness in Europe by accelerating growth elsewhere.
Figure 1. US: Distribution of FY16 Revenues of Top 15 US-Domiciled Retailers with Exposure to UK/EU Markets, by Geography Rank
Retailer
US
UK
Rest of World 14.7%
Notes
11.1%
Non-UK Europe 0.0%
1
Walmart
74.2%
2 3 4 5 6
Kroger Costco Home Depot Walgreens Boots Alliance Target
100.0% 72.6% 91.0% 78.3% 100.0%
0.0% 2.0% 0.0% 8.9% 0.0%
0.0%
