Sports Direct and Debenhams will be hardest hit by Brexit, according to Canadian bank RBC - here's why

 
Helen Cahill
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Mike Ashley's company will be badly wounded by the Brexit vote, analysts have predicted (Source: Getty)

Debenhams and Sports Direct are likely to be two of the retailers hardest hit by Brexit, according to Canadian bank RBC, due to currency pressures and rising costs for the industry.

The analysts predicted that disposable income in 2017 would be flat - as compared to growth of around five per cent this year - due to a weaker labour market, and higher inflation.

Retail prices could rise by three per cent next year, they said, based on the fall in sterling after the Brexit vote, as well as the increase in the UK living wage.

RBC downgraded Debenhams, saying the company would see a higher risk to its like-for-sales than average due to sourcing its goods in dollars, and intensifying price competition between middle-market retailers.

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Debenhams' share price fell by more than four per cent today after the report was released.

They downgraded Sports Direct to "underperform" due to "cost and currency pressures", and set the company's target share price at 280p. The retailers' share price fell by 2.79 per cent today on the news, falling to around 295p at time of writing.

"Sports Direct has a strong position in UK sports retailing and asset backing from strategic stakes in other retailers, but we think it will be challenging passing on dollar cost inflation at a time of pressure on consumer disposable incomes," RBC said.

Inflation would hit Sports Direct particularly hard, RBC argued, because as a discount retailer, it would be less able to pass on inflation pressures to its consumers.

Online fashion retailer ASOS was deemed "especially well positioned", RBC said, due to the recent falls in sterling, and its continued investment in its logistics network.

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RBC analyst Richard Chamberlain said: "The general retail sector has bounced back from a post-Brexit sell off. However, we still see opportunities to buy stocks likely to see upwards earnings revisions.

"We favour higher quality merchants and online retailers and we are more cautious on companies likely to see like-for-like sales and margin pressure in the second half and in 2017."

Inventories would also have a big effect on retailers in the coming months - Sports Direct and H&M are both overstocked relative to their sales trends, RBC analysts said.

Sports Direct and Debenhams declined to comment.

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