LONDON (ShareCast) - JP Morgan has lowered its rating on Home Retail Group to ‘underweight’ from ‘neutral’ saying that the Argos and Homebase owner is likely to feel the impact of inflation.
In a review of the European retail sector, the broker said a surge in inflation in 2009 is likely to damage UK gross margins.
“Retailers face a wall of inflationary pressure from raw material and transport price increases, double-digit labour inflation in most sourcing locations and a reduction in export subsidies,” it said.
“UK retailers also face a currency headwind, leading to input cost pressure in double digits.”
It continued: “2008 will be sheltered by hedging and forward buying, but the full impact is likely to be felt through 2009.”
JPM said it was downgrading Home Retail, “given its 100% UK exposure and the highest potential impact from inflation.”
However, the broker thinks that certain stocks have been oversold, such as jeweller Signet, adding that it was upgrading the H Samuel owner to ‘neutral’ from ‘underweight’. There is also the potential for Signet’s core US market to recover before its UK operations do, it said.
JPM said that retailers with strong European operations such as the clothes retailers H&M and Benetton and the electrical retailer Kesa are likely to see cost pressures offset by currency factors. It keeps its ‘overweight’ rating on the latter.
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