UPDATE: UK Retail Shares Up As Govt Keeps No VAT On Food, Kids Clothes

22nd Jun 2010 14:59

(Adds analyst comment.) LONDON (Dow Jones)--U.K. retail stocks rose Tuesday after the U.K.'s coalition government announced a value-added-tax rise from next year but kept food and children's clothes exempt. VAT will increase to 20% from 17.5% Jan. 4, George Osborne said, delivering his first budget as U.K. Chancellor of the Exchequer. The rise to 20% was broadly expected by the retail industry, but the notice period and the fact that VAT wasn't extended to other product categories will soften the blow for high-street retailers and supermarket groups with non-food offers, PricewaterhouseCoopers analyst Mike Bailey said. Head of Retail & Wholesale at Barclays Corporate, Richard Lowe, said the timing of the rise protects the key Christmas trading period and will help stimulate sales between now and then as shoppers bring planned big-ticket purchases forward before the change. Lowe said retailers will have been looking at cost bases and price points since January this year. However, Shore Capital analyst Clive Black said the increase will squeeze discretionary income in 2011 and will make it harder for retailers to maintain performance levels, even if this will be partially offset by a lower corporation tax rate. Black also said retailers will face a spike in costs at the year-end to prepare their systems for price changes. Food retailers will materially outperform in general retail spaces due to guaranteed footfall, he said. "Overall, we believe that the U.K. food retailers and domestically orientated consumer staples will be relieved by the outcome of the budget, given the already careful management of their companies in recent years," he said. At 1352 GMT, electronics group DSG International PLC (DSGI.LN) was up 1.4% at 28 pence, clothing, food and homeware retailer Marks & Spencer Group PLC (MKS.LN) was up 2.4% at 351 pence, and supermarket group Tesco PLC (TSCO.LN) was up 1.9% at 395 pence. -By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410; [email protected] (END) Dow Jones Newswires June 22, 2010 09:59 ET (13:59 GMT)