Polish Biggest Clothier LPP Falls as Strong Dollar Crimps Margin

  • LPP drops to a two-month low in Warsaw, trailing WIG20 gauge
  • `Don't expect a significant increase in dividends,' CFO says

LPP SA plummeted to a two-month low on Thursday as investors shun the country’s largest clothing retailer, whose net income has been battered by the strong U.S. dollar that eats into its profitability.

The shares slumped as much as 4.1 percent, and traded 2.7 percent lower at 5,215 zloty, the lowest since March 7, as of 1:54 p.m. in Warsaw. The company has lost 6.1 percent this year, trailing a 1.7 percent drop in Warsaw’s equity benchmark WIG20 Index, after the stock tumbled 23 percent last year and 20 percent in 2014.

The first-quarter loss widened to 65.6 million zloty from 37.3 million zloty a year earlier, falling short of the average analyst estimate of 36.9 million zloty in a Bloomberg survey. Rising sales failed to compensate for the effect of the stronger U.S. currency. LPP, whose main competitors in Poland are Hennes & Mauritz AB and Inditex SA, in recent years expanded its network abroad and now runs more than 1,600 stores from the Middle East to Russia and Germany.

As earnings come under pressure from unfavorable foreign-exchange rates, LPP is seeking to renegotiate its rents away from fixed prices to ones linked to sales of each outlet, with around 15 percent of its Polish network already moved to the new system, Chief Financial Officer Przemyslaw Lutkiewicz told reporters in Warsaw.

“Everyone forgot about the strong dollar last year, and such an environment is hitting our profitability a lot,” he said, adding the company doesn’t expect a “significant” increase in dividend payouts in the next years due to its debt load and an “ambitious” network development plan.

LPP is prone to the currency swings as it pays in dollars for its production ordered in Asia, while its rents are mainly in euros. The zloty hit a 12-year low against the dollar and a four-year low to the euro after S&P Global Ratings cut Poland’s ratings in January. At the same time, LPP can’t pass higher costs onto its customers “due to competitive pressure in Poland,” it said in a presentation on Thursday.

The retailer proposed to return investors 59.9 million zloty as a dividend from its last year’s profit. LPP also plans to spend about 390 million zloty this year on expanding its floor space by 10 percent to 931,300 square meters and expects a similar pace to be kept in 2017, according to Lutkiewicz.

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