The cost-of-living crisis for UK consumers has just begun, said JPMorgan, which lowered profit forecasts by 5% on average for London-listed retailers.
For consumers, food and fuel represented 20% of spending in 2019 and have been increasing as inflation starts to bite, said the bank.
“Even if the UK energy price cap were to be frozen at current levels, we estimate that consumer spending on discretionary items would need to reduce (by mid-single-digit percentages) by 2023,” the American bank said in a note. “With no such freeze, a 10% reduction would be implied.”
According to JPM analysts, retailers are entering this period with input costs and operating expenditure “still much higher than pre-crisis levels.”
Notably, freight costs remain 390% above pre-crisis levels, although they have been easing recently, they added.
Additionally, store staff costs are one of a retailer’s largest costs.
“Every roughly 5% of incremental wage inflation would weigh on margins by 30bps [basis points] from store staff alone,” the bank said.
While energy is a much smaller cost for retailers, it remains highly volatile and details on support for businesses are yet to be clarified.
Analysts at the bank, therefore, predict a roughly “20bps margin drag across the sector on average for every 100% inflation.”
As well as that, an increase in the price of cotton and wholesale utility costs are some of the biggest rises in operating expenditure.
Earnings estimates were cut for Boohoo Group PLC (AIM:BOO) by 20.6% for this year and 16.7% for next; Dunelm Group PLC (LSE:DNLM) by 8.1% for next year; Moonpig Group PLC (LSE:MOON) cut 6.3% this year and 3.8% next; Next PLC (LSE:NXT) cut 6.7% for next year; Kingfisher PLC (LSE:KGF) up 0.3% this year and cut 10.1% next year; and Marks and Spencer Group PLC (LSE:MKS) up 2.4% this year and cut 16.6% next year.
Target prices were cut for Kingfisher (to 220p from 245p), M&S (to 120p from 165p) and Next (to 6,000p from 7,280p).