European General Retail
The early bird catches the retail cycle; upgrading
Debenhams to N; lowering H&M to UW and Dufry to N
European General Retail
Richard B ChamberlainAC
(44-20) 7325-5276
richard.b.chamberlain@jpmorgan.com
Adam Cochrane
(44-20) 7325-0518
adam.g.cochrane@jpmorgan.com
Jaime Vazquez
(44-20) 7325-0993
jaime.vazquez@jpmorgan.com
Alastair Johnston
(44-20) 7325-4523
alastair.johnston@jpmorgan.com
J.P. Morgan Securities Ltd.
See page 83 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Key dates in Non-Food Retail
23-Jan ONS UK Retail sales
29 Jan H&M FY08 results
29-Jan Spain INE data
3 Feb TNS data for 4 wks to 25 Jan
12-Feb Arcandor Q1 results
16 Feb Banque de France data
17 Feb Benetton prelim FY08 results
19 Feb PPR Q4/FY08 results
19 Feb Kingfisher Q4 trading statement
3 Mar TNS data for 4 wks to 22 Feb
12 Mar HRG Q4 trading statement
13 Mar Banque de France data
25 Mar Inditex FY09 results
Source: Company data
• Having been early to suffer in the current bear market, the pan-Euro General
Retail sector has outperformed the market by c.15% in the past quarter.
This report examines the prospects for further outperformance and
highlights the stocks we think investors should own and those to avoid.
• The General Retail sector has historically traded as an “early cyclical”, but
we show how sales momentum has become more important as a sector
driver in recent years. This is likely to offset the positive effect on
disposable income from lower interest rates and fuel prices.
• We have divided non-food retail stocks into five baskets: 1) long-term
winners; 2) retailers responding to maturity; 3) leveraged international
cyclicals; 4) domestically focused strong dollar losers; and 5) options on
survival.
• Our top “growth” pick in the sector is Inditex (OW), which is taking
share from independents in fragmented clothing markets, which is
becoming relatively more price competitive and which has potential for
more generous shareholder remuneration. We prefer this to rival H&M
(downgrading to UW) for which we see margin and volume risk on account
of a stronger dollar and because we think Inditex’s current 17% cal. 09e P/E
discount is too wide.
• Our top “value” pick in the sector is Marks & Spencer (OW), which
following a torrid two years, we expect to outperform driven by a
stabilisation of its food business, better cost and capex control, and improved
inventory control in clothing.
• We upgrade Debenhams to Neutral from Underweight as we think the
company’s strategy will enable it to survive the downturn. We also
downgrade Dufry from Overweight to Neutral as following our earnings
downgrades, the stock no longer looks compelling value.

Table of Contents
Overview ...................................................................................3
Negative sales momentum offsetting falling interest rates ..5
Strong dollar a headache for most retailers ........................13
Pricing surveys suggest early signs of inflation .................20
Newness as well as price important in a downturn.............23
Balance sheets in focus.........................................................27
Valuation favours Inditex vs. H&M........................................31
Company profiles ...................................................................33
Inditex......................................................................................35
Hennes & Mauritz ...................................................................38
Marks & Spencer ....................................................................42
Debenhams.............................................................................45
Next..........................................................................................49
Dunelm ....................................................................................52
Benetton..................................................................................55
Arcandor .................................................................................58
Kingfisher................................................................................61
Home Retail Group .................................................................65
Kesa.........................................................................................69
DSGi.........................................................................................73
Dufry........................................................................................76
Appendix .................................................................................80