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Lower dollar to hit specialty stores and landlords

The Australian dollar dropped to a 20-month low overnight as sharemarkets in Europe and the US suffered heavy losses. It’s currently buying 94.8 US cents.

While its excellent news for exporters and Australian companies with offshore operations, it’s not so good news for small Australian retailers and speciality stores. Much of their product is imported and so will be facing higher prices and margin squeeze, unless they pass on the full cost to customers.

Larger retailers have the luxury of being able to hedge their exposure, should they choose, thereby limiting their exposure to some degree.

For companies like The Reject Shop (ASX:TRS) and Fantastic Holdings (ASX:FAN), which operates the Fantastic Furniture stores, those higher product costs may translate into lower profits. At an extreme level, the falling dollar could lead to store closures in shopping malls, putting pressure on landlords, who are already facing many struggling retailers.

Westfield Retail Trust (ASX:WRT) and Stockland (ASX:SGP), as well as other shopping mall owners could also take a hit from an unexpected direction, with global brands like Zara, Hollister and Gap attracting lower “anchor-style” rents. To attract more global brands, shopping centre owners are giving them more assistance in setting up shop, than local speciality stores.

It’s also bad news from another direction, with consumer confidence faltering again. According to a Jones Lang LaSalle Survey, just 29% of centre managers expect rental growth in the next six months. Vacancy rates are growing, and are at their highest since the survey began, while specialty rental growth has dropped from 3.8% in 2012 to just 1.2% in the last 12 months.

Foolish takeaway

A lower Australian dollar exchange rate looks like bad news for shopping centre landlords and small to medium speciality stores. The upside is that the low exchange rate might prompt Australian consumers to buy more products locally, as offshore retailers become expensive.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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