Little evidence of widespread festive cheer in UK, Europe: S&P Global

Economic uncertainty and lingering concerns about high prices are constraining domestic demand, while tariffs have begun to hit exports to the United States.

In the United Kingdom, households face the added worry of a weakening labour market and uncertainties due to potential changes to taxation and public spending in the government's Autumn budget, scheduled for two days before Black Friday (28).

The so-called ‘golden quarter’—the final three months of the year (Q4) that include Black Friday, Cyber Monday and the Christmas sales—is crucial for retailers and can account for as much as a third of sales and up to half of the annual profits of retailers selling discretionary products, including apparel.

Weak consumer confidence has translated into lower retail sales volumes , with spending on goods (excluding motor vehicles) in the eurozone still over 5 per cent below the level suggested by the pre-pandemic period (2018 and 2019) trend.

That weakness is also weighing on profits, with our forecasts predicting that only about half of the retailers S&P Global ratings rates will have returned their earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins to pre-pandemic level of 2019 by 2027, S&P Global Ratings said in a release.

Margins will remain under pressure as operating costs, and particularly wages, remain high, and pricing flexibility is constrained by strong competition and value-seeking consumers.

This, together with ongoing investment in stores and e-commerce, will hit free cash flow generation and could ultimately weigh on some retailers' credit quality as about a quarter of rated European retailers have weak or vulnerable business risk profiles, and over one-third have highly leveraged financial risk profiles.

The rating agency expects rated retailers in Europe to increase sales by an average of 2-3 per cent compared to Q4 2024 , primarily from price pass throughs on flat underlying sales volumes and despite partial offsetting by promotions. However, we expect sales growth to vary considerably given the wide range of retail business models and markets.

In the apparel sector, most rated retailers like H&M, Hugo Boss, Next and M&S continue to invest in their omni-channel capabilities across their store networks and e-commerce platforms. Retailers in the mass-market segment will face tougher competition and will have to remain extremely price competitive, it added.

ALCHEMPro News Desk (DS)