Broker HSBC warned of “progressive margin pain” in the second half of the year and identified Argos and Homebase owner Home Retail Group as being at particular risk.
HSBC analyst Paul Smiddy said: “While the industry’s sales data continues to confound many observers, we believe the margin costs of maintaining the sort of demand seen in January are unsustainable.”
He warned: “The issue will rise in importance in coming months in terms of sector sentiment, and is likely to be a force in bringing the current rally to an end.”
He added that stores’ ability to land suppliers with the cost burden would be “constrained by a need to keep some bare minimum of profitability in stressed suppliers” and warned: “Retailers’ ability to push this input inflation onto consumers will be severely constrained by a UK trading environment that might well deteriorate further from here.”
Smiddy changed his stance on Marks & Spencer from neutral to underweight and downgraded Next from overweight to neutral.
But he was most concerned about the effect of sterling’s weakness on Home Retail. He said that the gross foreign exchange hit to the store group could equate to 180 per cent of his 2009/10 profit forecast for the business.
HSBC reiterated its underweight stance on Home Retail and said: “In recent years, management has built its earnings case on creating more commonality in sourcing between the two divisions, cutting out agents and importers and buying as much as possible directly from the Far East. This strategy will now pay out in reverse.
“Further, Argos’s position as a price leader, moreover using the less flexible catalogue model, means that it will be more badly positioned than most of the sector in raising prices.”
Home Retail Group declined to comment.