Weak sterling boosts one retailer and beats another

Since the EU referendum, the pound has weakened by as much as 18% versus the dollar. This has been caused by uncertainty surrounding the UK’s economic outlook, as well as an increasingly loose monetary policy in the UK. The effect of weak sterling on UK retailers has been mixed, with one retailer today reporting difficulties caused by the weak pound and another saying that it has benefitted its business – a lot.

The retailer that has had it tough due to the weak pound is Halfords (LSE: HFD). Although it’s still on track to meet its full-year expectations, Halfords says in today’s update that it has experienced cost headwinds because of the depreciation of sterling. Due to the potential for sterling to weaken yet further versus the dollar as Brexit negotiations begin, it could experience more difficulties over the medium term.

Although the company has developed initiatives such as alternative product sourcing and generating efficiencies to mitigate against a weaker pound, Halfords is likely to continue to struggle with higher import prices. Its earnings declined by 13.5% in the first half of the current year, with it being unable to pass on the additional costs to consumers. Therefore, while Halfords’s sales increased by 6.3% in total and by 2.2% on a like-for-like (LFL) basis, its margins were squeezed. In fact, Halfords recorded a fall in retail margins of 2.75% versus the same period of the prior year. This trend looks set to continue as sterling weakens.

Super-sized sales

Of course, a weaker pound is good news for other retailers. Fashion retailer SuperGroup (LSE: SGP) also reported today and its sales for the first half of the year increased by 31.1%. Its performance in non-UK markets was given a boost by weak sterling, with currency effects contributing one-third of the total rise in revenue versus the same period of the prior year.

Looking ahead, SuperGroup’s gross margin is likely to come under pressure. This is due to higher sales of lower margin wholesale items, as well other one-off costs as the company continues to reorganise. However, its potential to grow outside of the UK has been enhanced by new distribution facilities in the US and Europe. This should allow it to open more stores and benefit from the potential for weaker sterling over the medium term.

SuperGroup trades on a price-to-earnings (P/E) ratio of 19.3. Although this is relatively high, the firm is forecast to increase its bottom line by 11% in the next financial year. This means that it has a price-to-earnings growth (PEG) ratio of only 1.75, which indicates that it offers good value for money.

Although Halfords has a lower P/E ratio than SuperGroup at 10.8, it’s due to record a fall in earnings of 8% over the next two years. Alongside the potential for a weaker pound and Halfords’ apparent inability to pass on price rises to customers, this makes it a stock to avoid at the present time. That’s especially the case with Brexit likely to cause the pound to weaken even further in 2017.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Supergroup. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.