A Tale of Two Retail Sectors: Risks in Europe vs. the U.S.

Parts of the retail sector are at risk both in the U.S. and in Europe, but different forces are affecting the credit profiles of firms at home and across the pond. The market penetration of e-commerce models great (Amazon) and small, as well as the level of overcapacity in store networks are important factors that distinguish these risks, according to a new report by Fitch Ratings.

In Europe, the retail sector has the most at-risk issuers (rated 'b-*'/Negative or below), but there have been fewer defaults than in the U.S. and the ratings agency expects credit profiles there to stabilize next year.

Established, brick-and-mortar retailers in the U.S. are being dogged by increased competition from other specialty, off-price retailers like TJX and Ross Stores, while fast-fashion, online competitors and significant physical retail space overcapacity are having their impact as well, Fitch said. Store sales density for these incumbents is dropping, and profit margins are drooping as they invest more in online features and increasing price markdowns. “These trends are mitigated by cost-cutting and store closures,” Fitch analysts said. “In contrast, consumption patterns and online retail sales penetration vary widely across Europe and shopping space per capita across the continent is much lower than in the U.S.”

European retailers like Inditex and H&M have more room to expand and suffer only marginal hits on profit, Fitch said. Still, Amazon and other online retailers such as Zalando, ASOS or Shop Direct are knocking at the door and present longer-term threats to store-based retailers in Europe.

“The more successful European non-food retailers tend to have a well-developed omni-channel platform with a smaller physical footprint than their more traditional peers, benefiting from agile supply chains allowing them to stay responsive to fast-changing consumer preferences,” analysts said.

In the European food retail sector, Fitch believes companies are operating with 15% to 20% more space than they require; retailers are addressing the issue by closing stores or sub-letting space.
Despite the pressures they face, the credit profiles of European retailers should mostly stabilize in 2018 as they adjust business models and extend debt-maturity profiles, analysts said.

– Nicholas Stern, managing editor

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