A line is quietly being drawn in the sand on British retailers' plan to deal with rising sourcing costs from the slump in sterling.
Next prefers to pass on any cost increases to customers to protect its operating margin, and may take the hit to sales volumes instead. Associated British Foods's Primark wants to maintain its lead on price, leaving the pain to fall on its margin.
As for Debenhams, it doesn't have much room for maneuver on either front. There's little scope to raise prices, or absorb cost increases in the margin.
Debenhams has one of the lowest operating margins in the sector. And the retailer's got itself hooked on the drug of constant promotions to lure customers, though it's trying to kick the habit now.
The steps it announced Thursday to deal with the coming storm show that its being proactive. About 30 percent of the products it buys itself are paid for in dollars, and it's hedged until August 2017 at an average rate of $1.50 to the pound. It also has further protection in place into the following year, so the currency impact won't be felt until spring or summer 2018.
It's also trying to mitigate the hit by, for example, making its buying department more efficient. Like other retailers, it will also have some wiggle room with suppliers.
These are needed steps, but its relatively weaker starting position might explain why its forward price to earnings ratio of about 8 times lags both Next and Marks & Spencer. The higher costs that Debenhams can't avoid or address will hit it harder. Investors need to keep a close eye on its margin.
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