Home Retail worst affected by National Living Wage, warns Morgan Stanley

8th Sep 2015 11:58

(ShareCast News) - Home Retail has been downgraded by Morgan Stanley, which slashed its target price for the shares due to concerns about the impact of the UK's new National Living Wage on long-term margins."We believe the Living Wage announcement represents one of the biggest new structural challenges for UK retailers since the advent of the internet," the bank thundered.The new minimum wage, which Chancellor George Osborne introduced in his July budget, targeted to reach at least £9 per hour by 2020 above the current £6.50 per hour, has seen retailers generally downplay the issue but Morgan Stanley warned that it warrants closer attention from investors.In a detailed note working through the implications of how retailers will cope with wage costs, with employee costs typically equating to 10-20% of sales, the bank estimated that, all other things being equal, EBIT margins in the sector could theoretically fall by 400 basis points by 2020.Home Retail, the owner of Argos and Homebase chains, is where the analysts see the greatest downside in its retail universe due to its high level of operating leverage.The price target is slashed 19% to 125p from 180p and the rating to 'equal-weight' from 'overweight'."This is despite our conviction that the new Argos Store-in-store format represents a very exciting, and underappreciated, opportunity for the group and that there is still scope for the shares to double in a bull case scenario."However, our revised bear case now suggests circa 70% risk to the downside, making the risk-reward balance much less favourably skewed than when we put the shares on our buy list back in June."MS also cut its TPs on all other retailers, with Debenhams and Halfords trimmed by 10% and 9%, Dixons Carphone down 7%, Marks & Spencer's TP cut by 4% and Kingfisher, Pets at Home and Sports Direct all by 3%.Next on the other hand had its TP lifted 2% to 7,000p and Poundland by 5% to 295p.