UK Fashion Retailers' Earnings Rise But Outlook Still Murky

Major U.K. fashion retailers Debenhams PLC (DEB.LN) and Arcadia Group reported improved earnings Thursday, but stopped short of forecasting a sustained recovery into the key end-year holiday trading period and beyond.

Philip Green, the billionaire owner of Arcadia, which Thursday reported a 13% rise in operating profit to GBP213.6 million, told Dow Jones Newswires that the retail environment was stabilizing but he doesn't expect any real improvement for a while.

Rob Templeman, chief executive of Debenhams, said there were signs the wider macro-economic environment was improving, but he was unable to predict consumer sentiment or demand going into the crucial Christmas period.

Both companies reported higher sales in recent weeks, and boosted earnings by cutting costs and implementing new in-store strategies.

The sector has been hit hard during the downturn, with several companies going bankrupt. However, some sectors, such as food retail, have proved resilient, while companies remaining in other sectors have benefited from the bankruptices of rivals by picking up new business.

Most executives in the sector agree that trading remains tough and economists are predicting a slow recovery in U.K. retail sales in coming months after data from the Office for National Statistics showed retail sales volumes were flat in September for the second consecutive month. They were up 2.4% on the year-earlier period.

"With consumer confidence rising due to better news on the housing market, strengthening equities and a marked slowdown in the rate of deterioration in the labor market, we look for stronger retail sales figures in coming months," especially before the reversal of a sales tax cut at year-end, said James Knightley, U.K. economist at ING Bank.

"Nonetheless, with households still paying down debts and looking to save more in an environment of weak income growth, the recovery is likely to be slower and less vigorous relative to previous recovery periods."

The U.K. government cut the sales tax, or Value Added Tax, to 15%, from 17.5%, last December, to try and encourage consumer spending as the economy moved into recession. However, the rate will revert to 17.5% January 1, 2010, and some economists are predicting it will rise further in coming years as the U.K. government tries to reduce its huge debt burden.

Green's pedigree in retail spans a decade of successful turnarounds. He bought department store British Home Stores (BHS) in 2001 and added Arcadia group, home of fashion chains Topshop, Dorothy Perkins and Miss Selfridge, in 2002. He has also made two audacious, but unsuccessful, attempts to buy the U.K.'s largest clothing retailer Marks & Spencer Group PLC (MKS.LN).

He has kept Arcadia company private, paying himself generous personal dividends.

The group reported a 2.3% rise in sales at stores open at least a year in the seven weeks since Aug. 29, although Green cautioned against reading too much into the progression considering the dismal state of retail sales this time last year when consumer sentiment plunged after the collapse of Lehman Brothers.

BHS was consolidated into Arcadia Group's results for the first time in the company's full year results. It doesn't give full profit figures or a breakdown by brand because as a private company, Arcadia doesn't have to meet the same regulatory disclosure rules as a listed company.

However, Green said Topshop, Topman and Miss Selfridge had a record year due to their market leading positions, while the more middle-market brands didn't fare quite as well, something to be expected in an economic downturn. The group has cut administrative and distribution costs in response to the downturn.

Topshop, which opened its first U.S. store in New York in April, Topman and Miss Selfridge all cater fashions for younger consumers. Model Kate Moss has a fashion line at Topshop.

Debenhams, meanwhile, said sales in the year to end-August rose 0.2% to GBP2.34 billion, in line with market expectations, while pretax profit, excluding exceptional items, rose 13.7% to GBP125.2 million, slightly ahead of market expectations of GBP123 million and up from GBP110 million last year.

Debenhams has undergone a major space reallocation at its stores, converting floor space previously occupied by store concessions to its own-brand and designer range. The revamp disrupted sales but is already starting to improve margins, which are up 70 basis points on year.

While CEO Templeman can't predict how good the Christmas season will be for retailers, he did plump for a remote controlled helicopter and the ever-popular Chanel No 5 perfume as hot Christmas sellers.

-By Kathy Sandler, Dow Jones Newswires; 44-207-842-9293; kathy.sandler@dowjones.com

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