Credit ratings agency Moodys has downgraded its ratings on value fashion group Matalan.

Moody’s assistant vice-president and lead analyst for Matalan Yasmina Serghini-Douvin said the decision was prompted by likely pressure on margins.

She said: “Today’s rating action reflects Moody’s view that the inflationary pressures that have been building on Matalan’s supply chain since the second half of 2010 are likely to continue over the medium term, causing higher than anticipated stress on the company’s operating margins.

“In a context of weakness in the consumer segment in the UK, Moody’s expects the company’s gross margins to be constrained by the surge in cotton prices over recent months combined with the rise in freight rates and labour costs in Matalan’s sourcing countries.

“Moreover, uncertainty remains as to how the UK clothing industry will respond to these rising costs for the autumn/winter season; whilst Moody’s expects prices to increase to enable retailers to recoup at least some of the cost increase, it also believes that Matalan’s positioning as a value clothing retailer leaves less room for manoeuvre, and that the company could have to wait before acting on the cost inflation, to preserve its price positioning and volumes.

“The risk to Matalan’s profits will crystallise in the latter part of the current year, when the full effect of the cost increases kicks in.”

She welcomed “Matalan’s intention to slow the pace of new investments, and to pursue its tight buying and inventory management in order to preserve its cash flows” and said that the ratings “also reflect the company’s good level of profitability supported by its track record of operating in an efficient manner and the expectation of sustained positive free cash flow generation.”