January 8, 2016 / 12:00 PM / 2 years ago

RPT-Slumping currency holds silver lining for Canadian retailers

4 Min Read

(Repeats Jan 7 item with no change to text)

By Alastair Sharp and Amrutha Gayathri

Jan 7 (Reuters) - The Canadian dollar's plunge to a 12-year low is seen boosting sales for the country's retailers in 2016 as fewer shoppers cross the border south, but profit growth will vary depending on their ability to control import costs and push through price increases.

The currency has lost roughly a third of its value against the U.S. dollar since the start of 2014 as weaker prices for oil, a key Canadian export, triggered a mild recession last year. It fell to less than 71 U.S. cents this week.

In their 2016 outlook for Canada, the commercial real estate services firm CBRE says an influx of tourists and foreign retailers such as Nordstrom Inc setting up shop should help spur retail sales growth despite limp economic growth.

"Overall, the low loonie is a positive for Canadian retailers," said Arlin Markowitz, who analyses urban retail investment properties for CBRE. "It's not only keeping Canadians' purchasing power at home, but it's also attracting tourists."

The Conference Board of Canada has forecast 4.2 percent growth in retail sales in 2016, up from a likely gain of 1.3 percent in 2015. But it said with costs likely to jump at a similar clip, margins will likely hold steady.

Canada notched a 9.3 percent increase in inbound overnight trips by U.S. residents in the first 10 months of 2015, according to Statistics Canada, while there was a 21.2 percent decline in the number of Canadians returning from same-day trips across the border.

"I suspect cross-border shopping (to the U.S.) will all but die now," said Doug Porter, chief economist at BMO Capital Markets "That's a positive for Canadian retailers."

Import Price Challenge

Still, the weak loonie complicates operations for virtually all Canadian retailers, especially for those who import a lot of goods.

The Conference Board noted in its December report that retailers such as yogawear chain Lululemon Athletica Ltd were recording healthy sales growth due to their specialized products, even as major chain stores such as Sears Canada Inc and Hudson's Bay Co were finding it harder to raise prices.

Bargain chain Dollarama Inc, which relies heavily on Chinese imports priced in U.S. dollars, has already broadly raised shelf prices to improve margins, but now risks losing market shares to rivals, said Neil Linsdell, consumer analyst at brokerage Industrial Alliance Securities.

As hedging strategies run out of room and margin pressures worsen, more stores are expected to follow that lead.

"Retailers as much as possible have been absorbing the devalution of the Canadian dollar," said Daniel Baer, a retail and consumer industry analyst at Ernst & Young. "If the exchange rate stays where it is, the impact on pricing will be much more pronounced."

At Canadian Tire Corp, executives said in December that the weaker currency and economic slowdown in Alberta had hurt its workwear brand Mark's, pushing its overall retail gross margin excluding petroleum down 33 basis points to 32.9 percent.

Hudson's Bay last month cut its sales forecasts for 2015 and 2016, in part blaming the strong U.S. dollar for less tourist traffic to its luxury Saks Fifth Avenue stores in the United States.

BMO's Porter said the relentless one-way move in the currency is going to cause more and more retailers to "throw in the towel" and raise prices.

"You don't want to raise prices constantly but you've got to make adjustments, because you've got to be profitable," said Michael Budman, a co-founder of Roots, one of the country's most recognizable clothing brands.

He said privately-held Roots has been helped by the use of domestic manufacturing and sales in its sizable Asian footprint priced in U.S. dollars. (Reporting by Alastair Sharp in Toronto and Amrutha Gayathri and Sneha Banerjee in Bengaluru; Editing by Chizu Nomiyama)

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