No let-up for non-food retailers in 2017, Fitch warns

Rating agency Fitch said it expects non-food retailers' profitability and free cash flow to remain weak in 2017.

Reinforced by recent reports from Next and against a background of poor industry data, as typified by the BRC statistics released on Tuesday, the agency said the market pressure on non-food retailers would prevent much meaningful deleveraging and therefor expose their debt to greater risks from increased competition, changing consumer spending habits and inflationary pressures, particularly in the UK.

"Shopping habits among younger consumers are changing rapidly, especially in apparel. They are demanding ever-greater integration between high-street outlets and online, and faster refreshing of fashion lines" Fitch said.

"But overall spending on clothing is also falling as consumers opt to spend more on services and experiences."

These trends, which led Next to report a 9.3% drop in UK retail footfall in December, are increasing and Fitch foresees any benefits retailers gain from cost-cutting will have to be ploughed into new investment or used to keep prices low.

"This will prevent any significant improvement in profitability for the sector this year," analysts felt, adding that retailers were running out of other options for addressing high leverage, such as selling assets, or pursuing a longer-term strategic repositioning as Marks & Spencer is attempting.

"Volatile consumer behaviour and slowing economic growth also mean execution risk from companies' plans to transform their business models will rise in 2017."