Apr 8, 2010
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Europe's retailers wary amid sluggish recovery

Apr 8, 2010

By Mark Potter and Nicholas Vinocur

LONDON/STOCKHOLM (Reuters) - Europe's retailers are seeing only tentative sign of economic recovery and are worried that steps to rein in government borrowing could hit consumer spending in the months ahead.

Swedish fashion chain Hennes & Mauritz (HMb.ST) and British clothing and foods group Marks & Spencer (MKS.L) both reported better-than-expected sales figures on Thursday 8 April, but said new products and cost cuts had driven the gains.

"I do believe that 80 percent at least of what's happened to us is the fact that we've worked hard to get our business in a better place," Marks & Spencer (M&S) executive chairman Stuart Rose told reporters.

"This is about pinching market share from competitors," he said, adding consumer spending was likely to be "pretty flat" in Britain this year as a new government, following elections on May 6, seeks to cut debt from a record 12 percent of GDP.

Official data showed on Thursday 8 April that retail sales volumes were flat in February versus January across the European Union's 27 member states, supported by a strong performance in Britain.

For the 16 members of the euro zone, retail sales fell a bigger-than-expected 0.6 percent.

"The further drop in retail sales in February maintains suspicion that consumer spending is likely to remain a weak link in the euro zone's recovery over the coming months, thereby limiting overall growth prospects," said IHS Global Insight economist Howard Archer.

"High and still rising unemployment across the euro zone, likely muted wage growth over the coming months and the ending of car scrappage schemes will likely limit the upside for consumer spending," he added, noting fiscal policy would also generally be less supportive as governments look to cut debt.


H&M, Europe's second-biggest fashion chain, said pretax profit leapt a larger-than-expected 42 percent to 5.1 billion Swedish crowns ($700 million) in the three months ended February, the first quarter of its fiscal year.

Same-store sales rose 2 percent in what the firm described as a tough economic environment, helped by strong demand for its spring ranges. They also surged 9 percent in March, flattered by a weak performance in the same month last year.

"We can see signs that (the economic climate) it is turning in some markets," said Chief Executive Karl-Johan Persson.

"I'm not an expert, but my guess is that it will improve somewhat this year."

H&M, like bigger Spanish rival Inditex (ITX.MC), has coped better than many clothing retailers in the economic downturn, thanks to its focus on low prices as fast-changing fashions.

Japan's Fast Retailing (9983.T) also reported a 43 percent surge in first-half operating profit on Thursday 8 April, helped by strong sales at its budget fashion chain Uniqlo.

Yet H&M, which has around 2,000 stores across 37 markets, said tight cost control was also a key part of profit growth.

At 1030 GMT, its shares were up 5.7 percent at 497.8 Swedish crowns, after touching a record high of 498 crowns, outperforming a 0.1 percent rise on the STOXX 600 European retail index .SXRP.

Citi analysts saw analysts' consensus full-year profit forecast rising 4-5 percent to 25.5-26 billion crowns.


M&S, which is Britain's biggest clothing retailer and also sells food and homewares, said sales at British shops open at least a year rose a higher-than-expected 5.1 percent in the 13 weeks to March 27, the last quarter of its financial year.

Rose described the British clothing market as "broadly flat," and said the group had lifted market share by 110 basis points to 11.9 percent, helped by particularly strong demand for its knitwear and formalwear ranges.

M&S also said it was on track to hit analysts' current full-year profit forecast of 620-630 million pounds, with stronger British sales offset by higher bonus payments, weak fourth-quarter international sales, particularly in Greece and Ireland, and a small rise in operating costs.

M&S's profits plunged 40 percent to 604 million pounds in the year ended March 2009, hit by its mid-market position in clothing and upmarket position in food.

The group has fought back, introducing lower-priced "Wise Buys" in food and new clothing ranges like Indigo.

Analysts, however, say new Chief Executive Marc Bolland, who turned round Wm Morrison Supermarkets (MRW.L) and joins in May, faces a battle to lift profits back towards 1 billion pounds.

"We remain concerned over the outlook for consumer spending and despite this strong performance there are still some fundamental problems that need to be addressed by the new CEO," said Execution Noble analyst Caroline Gulliver.

At 11:30 a.m. (British time), M&S stock was down 1.3 percent at 373.3 pence.

(Editing by Simon Jessop)

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