Halfords and N Brown sink as UBS turns cautious on UK general retail

Halfords and N Brown were under the cosh after UBS downgraded its stance on both stocks as it took a more cautious view on the UK general retail sector over the next 12 months.

The bank said uncertainty over Brexit and wage inflation was compounded by FX issues and the increasing impact of Amazon on the sector.

“The most important transactional currency for UK general retail is the GBP/USD and, with a range of 1.55 to 1.25, we calculate that theoretical sector earnings impact for 2017 could be between +20% and -40% from current spot rates before any mitigation or price increase.

“History suggests a significant degree of mitigation is possible but, in our view, given the significantly net importing nature of UK retail, the uncertainty will weigh on valuation.”

UBS downgraded Halfords to ‘sell’ from ‘neutral’ and cut the price target to 330p from 365p, noting the stock has had a good run recently.

The bank said Halfords’ focus on service and fitting has provided some insulation from cheaper online competition.

It said that while Amazon may be able to further penetrate some of these categories especially with same-day delivery, on balance there will be larger problems at other retailers.

However, the FX issue is significant and the prices will likely have to be passed through to the consumer to maintain margins, which could be hard given the threat of increased competition.

“On costs the company has been quite open on the impact of minimum wages but it is constraining earnings growth,” UBS said.

The bank also downgraded N Brown, to ‘neutral’ from ‘buy’ and trimmed the price target to 360p from 380p.

“Whilst N Brown does not face the most significant FX or wage inflation issue given a significant proportion of the revenue is derived from the credit book, we think it is potentially in the firing line if Amazon were to materially improve its clothing offer.”

It said that although N Brown is protected some extent as most of its products are either own-brand or exclusives, the breadth of the Amazon offer as well as other retailers’ plus-sized ranges, create longer-term pressure on sales growth and gross margin.

At 1420 GMT, Halfords shares were down 4.6% to 404.20p and N Brown was down 5.4% to 340.70p.