Europe United Kingdom
Retail Retail-Non Food
26 February 2009
European General Retail
2010 Outlook - demand/supply
favours few sub-sectors
Rod Whitehead
Research Analyst
(44) 20 754 58492
rod.whitehead@db.com
Warwick Okines
Research Analyst
(44) 20 754 58546
warwick.okines@db.com
Jamie Isenwater, CFA
Research Analyst
(44) 20 754 75170
jamie.isenwater@db.com
Prospective winners and losers of current economic turmoil
Our proprietary demand model suggest that UK residual cash for non-food
spending will decline again in 2010, delaying any recovery by at least another year.
Supply factors are more favourable but focused on entertainment and DIY. We
have cut aggregate 2010/11 forecasts by 14% and, having outperformed by 20%
YTD and on a 10yr relative high valuation, we see only selective opportunities.
Caution prevails. We downgrade M&S and DSGI to Sell but reiterate Buys on
Kingfisher, PPR and HMV.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
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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. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
Marks & Spencer Group (MKS.L),GBP251.75 Sell
DSG International (DSGI.L),GBP21.25 Sell
Kingfisher PLC (KGF.L),GBP129.20 Buy
PPR (PRTP.PA),EUR46.74 Buy
HMV Group (HMV.L),GBP131.25 Buy
Recommendation changes
Company Old New
Marks & Spencer Hold Sell
DSGI Hold Sell
Next Buy Hold
Halfords Buy Hold
Signet Hold Buy
Global Markets Research Company
UK Demand – no recovery in 2010
Our analysis suggests that a rise in the 2009 savings ratio to 5% will more than
offset lower mortgage costs and household bills, leaving consumers with 4.4%
less cash for discretionary spending than in ‘08. 2010 residual cash is likely to
decline by a further 2% and could be compounded by a reversal of the VAT cut.
UK Supply - big benefit but to few sub-sectors
Whilst the outlook for demand is poor, supply should be more favourable albeit
only for certain sub-sectors. Our bottom-up capacity models suggest that
entertainment and DIY should see the biggest industry space reductions. On the
other hand, we see little overall help to the electricals and clothing sub-sectors.
Continental Europe demand outlook more favourable than UK
The demand outlook is more favourable for France and Germany than for the UK
and Spain. Unlike UK/Spain we expect a modest recovery in France and Germany
by 2010 due to a healthier level of household savings. Note, however, that we
expect less benefit on the continent from capacity withdrawal than in the UK.
Cautious sector view – back to stock picking
The UK General Retail sector has outperformed the market by c.35% since its
trough in July 2008 and by c.20% YTD. Whilst the absolute level of the sector is
close to trough, both the UK and Pan-European General Retail sectors now trade
at 10 year high relative P/Es. We see further outperformance as unlikely although
some specific stocks still look cheap.
Sell M&S and DSGI; Buy Kingfisher, PPR and HMV
On our 14% lower forecasts, the UK sector trades on 2010 10.8x P/E and 5.2x
EV/EBITDA. We downgrade M&S to Sell - the highest rated stock with the
weakest operational momentum. We also downgrade DSGI to Sell, projecting it to
breach debt covenants and to make a group loss in both 2009/10 and 2010/11. As
the biggest capacity beneficiaries, we remain Buyers of Kingfisher, HMV and
Game, and upgrade Signet. On the Continent, on c7.5x 2010E P/E, PPR is our top
pick.
Aggregate sector risks
Upside risk to the sector would come from a sharp cyclical demand recovery;
downside risk from sharp volume declines in response to US$-driven price
increases. We base our sector valuation off 2010 EV/EBITDA multiples, which we
view as appropriate in the current environment. This report contains a number of
material changes to recommendations, target prices and forecasts. These details
can be found in on pages 7 and 50.

Table of Contents
Introduction – be selective ............................................................... 5
From top down to bottom up ...................................................................................................5
Summary of major changes ......................................................................................................6
Supply................................................................................................. 8
UK Clothing & Footwear - supply and demand .........................................................................8
UK DIY Market - Supply and demand......................................................................................12
UK Entertainment - supply and demand..................................................................................15
The UK Carpet market.............................................................................................................17
UK Food – another year of expansion .....................................................................................18
France - supply in 2009 ...........................................................................................................18
The US Jewellery market ........................................................................................................19
Demand ............................................................................................ 22
No “safe havens” ...................................................................................................................22
UK – 2010 to disappoint..........................................................................................................23
France – better placed ............................................................................................................27
Germany – no bubble to burst ................................................................................................28
Spain – multi-year downturn ahead.........................................................................................29
Italy – tough times ..................................................................................................................30
Costs................................................................................................. 32
Cost of goods sold..................................................................................................................32
Operating costs.......................................................................................................................34
Financing concerns.......................................................................... 36
Overview................................................................................................................................36
UK Retail Balance Sheets........................................................................................................37
The key financing questions....................................................................................................38
M&A – only at the small end of the sector.................................... 46
Forecasts .......................................................................................... 48
Valuation .......................................................................................... 53
Absolutely low and relatively high...........................................................................................53
Focusing on 2010E EV/EBITDA...............................................................................................54Table of Contents (Cont´d)
Company pages ............................................................................... 57
Benetton........................................................................................... 58
Carpetright ....................................................................................... 60
Carphone Warehouse...................................................................... 62
Debenhams ...................................................................................... 64
Douglas............................................................................................. 66
DSG International............................................................................ 68
Fielmann AG..................................................................................... 70
GAME GROUP.................................................................................. 72
Geox SpA ......................................................................................... 74
Halfords ............................................................................................ 76
Hennes & Mauritz ............................................................................ 78
HMV Group ...................................................................................... 80
Home Retail Group.......................................................................... 82
Inditex............................................................................................... 84
Kesa Electricals ................................................................................ 86
Kingfisher PLC.................................................................................. 88
Marks & Spencer Group.................................................................. 90
NEXT................................................................................................. 92
Nobia ................................................................................................ 94
PPR.................................................................................................... 96
Praktiker ........................................................................................... 98
Signet Group.................................................................................. 100
Stockmann ..................................................................................... 102
WH Smith ....................................................................................... 104