Europe's Consumer and Retail Woes: Five Things to Watch in 2019

(Bloomberg) -- European consumer and retail stocks are on track for their biggest annual decline in 10 years and the worst may not yet be over for either companies or investors.

Political uncertainty in many parts of the region, falling shopper confidence and the potential for rising interest rates mean the odds are stacked against those that rely on consumers, even before considering imponderables such as regulatory tightening and the weather. Recent warnings from Asos Plc and Sports Direct International are unlikely to be the last.

“Although employment is growing and actually disposable income is growing, consumers don’t yet feel confident,” said Ian Ormiston, a fund manager at Merian Global Investors in London. “Europe is still a fairly fragile market.”

Here’s a round-up of some themes to watch for in 2019:

Christmas Sales

Some brick-and-mortar retailers will be facing a make-or-break holiday shopping season and the strength of their sales may determine whether creditors will continue backing them.

“Saying Christmas is vital for retailers is like saying humans need oxygen -- the overwhelming majority of sales and profit land in this critical trading period,” said Erin Brookes, head of European retail practice at Alvarez & Marsal Inc. “We expect that some sadly won’t survive 2019.”

Investors will be closely monitoring U.K. department-store chain Debenhams Plc, which issued multiple profit warnings this year, and is expected to provide a trading update on Jan. 10, the day of its annual general meeting. The stock fell to a record low on Tuesday and is down 87 percent in 2018.

Expansion Plans

Ocado Group Plc is on course to be the best-performing stock in the Stoxx 600 Index this year after announcing a string of international technology licensing agreements, including the landmark deal with Kroger Co., prompting bearish speculators to close their short positions on the U.K. grocer. Investors will be closely watching for any new deals in 2019, as well as progress on its current pact with Kroger.

Market darling Fevertree Drinks Plc is also eyeing U.S. expansion after signing an agreement with North America’s largest liquor distributor Southern Glazer’s Wine & Spirits in July.

Another stock to watch is Asos Plc after the U.K. online fashion retailer warned that its sales growth is coming under increasing pressure from a deteriorating climate. The company has sufficient liquidity for the near future, but may have to scale back on spending and growth ambitions unless cash flows improve, according to Morgan Stanley.

Tobacco Regulation

British American Tobacco Plc and Imperial Brands Plc shares are heading for their worst years on record, falling 49 percent and 27 percent, respectively. Yet most analysts remain bullish on the prospects for both companies, with the average price target suggesting more than 30 percent upside from current levels.

Investors have been jittery about regulatory tightening after the Food & Drug Administration confirmed it’s seeking to ban menthol-flavored cigarettes as well as implement other policy actions to curb sales of flavored e-cigarettes.

Weather Impact

Germany’s Zalando SE and Hugo Boss AG, Britain’s Moss Bros Group Plc and Poland’s CCC SA are among fashion retailers that blamed unusually warm and dry summer for disappointing earnings this year. Investors have rewarded retailers that have been quick to adapt their product offering to weather changes, and punished those who haven’t been able to keep up.

“What climate change seems to be bringing is greater extremes which can see whole seasons skipped -- not ideal if you are selling winter sports equipment or clothing where consumption is driven by the change of season,” Merian’s Ormiston said. “This record hot summer might be an exception, but the trend suggests that it is set to happen more frequently, which will worry retailers.”

Climate Change

Possible regulatory intervention related to climate change is another area to keep an eye on. Fashion retailers including Marks & Spencer Group Plc, Associated British Foods Plc’s Primark, Burberry Group Plc, Boohoo Group Plc and Asos faced the Environmental Audit Committee in November to answer questions relating to sustainability and labor. The U.K. Parliament may be considering ways in which it could intervene, Morgan Stanley said at the time.

Other sectors that may be facing tighter regulations because of climate change include oil and industrials. On Thursday, we’ll take a look at five things to watch for in these industries.

©2018 Bloomberg L.P.