Stable economic conditions providing support to European retailers

Steady economic prospects in most European countries will drive average retail earnings growth of 3.2% in 2019 and continue to support the stable outlook for the European retail sector, according to Moody’s.

In report for its clients, the rating agency said steady economic growth and falling unemployment will support retail demand into 2019 across much of continental Europe, offsetting fierce competition in many segments of the region's retail sector and supporting the industry's stable outlook. 

David Beadle, Vice President and Senior Credit Officer at Moody's, said that although economic conditions will remain supportive, some companies will struggle to adapt to changing consumer behaviours. 

“About one in three of the retailers rated by Moody's will grow their annual earnings by less than 2% in the next 12-18 months. This group includes only a few retailers - such as Spanish grocer Distribuidora Internacional de Alimentacion (DIA, Rated Ba2 rating under review for downgrade) and UK department store retailer Debenhams (B2 negative) - which are likely to see their EBITDA decline over the period.” 

In contrast, some retailers' earnings will grow much faster than the industry average during the next 12-18 months, Moody’s said. For example, Russian food retailer X5 Retail Group (X5, Ba2 positive), UK-based B&M European Value Retail (B&M, Ba3 stable) and Netherlands-based discounter Peer Holding III (Action, B1 stable) will see earnings push higher by more than 10%.

Moody's forecasts median EBITDA growth for continental European retailers of 4.2% in 2019, ahead of 3.0% in the UK, where Brexit will curb retailers' earnings growth potential. Indeed, earnings growth in the UK could be lower if there is a disorderly exit from the EU.

Competition from discounters and online specialists will continue to negatively impact progression of traditional retailers' earnings, particularly in the grocery segment. In response, many are making changes to store networks, developing new revenue streams, and partnering to get lower prices from suppliers. 

“However, the established trend of smaller specialists winning market share from larger bricks & mortar focused incumbents seeking broad appeal will continue,” Moody’s concluded.