9 minute read
NEWS
Why athleisure is holding up but demand for fast fashion is fading
Frasers and JD Sports are kicking on but challenges mount for beleaguered ASOS and Boohoo
According to the latest ONS data (22 July), UK retail sales volumes fell by 0.1% in June following a 0.8% decline in May 2022 as soaring inflation and the cost-of-living crisis put the squeeze on consumers.
However, two sector constituents shrugging off the wider malaise are Sports Direct owner Frasers (FRAS) and JD Sports Fashion (JD.), with sales of sportswear and athleisure holding up well amid the deteriorating economic climate.
Mike Ashley-controlled Frasers’ shares dashed ahead after the retail conglomerate behind House of Fraser, FLANNELS and Evans Cycles shrugged off inflationary pressures and supply chain challenges to report (21 July) a swing from losses of £39.9 million to forecast-beating adjusted pre-tax profits of £344.8 million for the year to 24 April 2022, buoyed by a strong reopening of physical stores.
Frasers also upgraded pre-tax profit guidance for 2023 to between £450 million and £500 million with CEO Michael Murray insisting it is ‘clear that our elevation strategy is working’ and that his charge is building ‘incredible momentum with new store openings, digital capabilities and deeper brand partnerships across all of our divisions’.
Sportswear rival JD Sports expressed confidence (22 July) headline profit before tax and exceptional items for the year to January 2023 will match last year’s record £947.2 million haul after delivering 5% like-for-like sales growth in the first five months of its new fiscal year.
JD Sports’ positive performance demonstrates athleisure is still in demand and younger customers, who may live at home or rent from a landlord picking up some of the slack from rising bills, can still find the money for must-have sneakers or essential gym kit.
ONLINE PLAYERS UNDER PRESSURE
ONS data revealed the proportion of retail sales online fell to 25.3% in June, its lowest proportion since March 2020’s 22.8%. Like JD Sports and Sports Direct, pure-play online fashion purveyors ASOS (ASC) and Boohoo (BOO:AIM) also target youthful consumers, but their growth is slowing as cash-strapped shoppers cut spending on nonessential clothing amid rising inflation and growing recession risks.
Margins are also being impacted by surging product returns. Costly and complex to handle, returns have long been a margin-eroding menace for the online-only clothing industry, which is why Boohoo quietly introduced a returns charge in early July in a bid to eradicate bad shopper behaviour. How much this will deter shoppers and hit market share is yet to be seen.
As for ASOS, suppliers have complained to the Daily Mail about orders cancelled at short notice as the retailer adjusts to weaker demand, though the company reassured the newspaper these were ‘postponements’ not cancellations and they are running at normal levels for this time of the year. Worryingly, suppliers seem to fear these are in fact cancellations from ASOS and that more may follow. [JC]
Pressure mounts on Vodafone to find acquisition fix for growth conundrum
Mobile network widely expected to emerge with a bid for rival Three as its tries to end years of underperformance
Overseas roaming price hikes have helped reverse years of lacklustre growth in the UK for mobile network Vodafone (VOD) in the first three months of its financial year to 31 March 2023.
But while squeezing Brits abroad helped offset declines in its biggest market Germany, as new regulation had an impact, it will do little to lift the pressure on Vodafone chief executive Nick Read.
Vodafone issued a largely in-line trading update for the first quarter to 30 June 2022 showing overall revenue nudging 2.7% to €11.28 billion, most of which was due to mobile price rises in the UK as rules on roaming charges were lifted following Brexit.
This was illustrated by organic services revenue growth in the UK in the quarter hitting 6.7%, compared to a range of between 0.6% growth and 2% declines across its major markets in Germany, Italy and Spain.
Investors continue to hope that Read will be able to use mergers and takeovers to spice up years of lacklustre financial performance from Vodafone, and equally flat shareholder returns.
In the second half to March 2022 Vodafone reported revenues and EBITDA (earnings before interest, tax, depreciation and amortisation) of £2.88 billion and £636 million respectively, versus £2.51 billion and £582 million in the second six months of 2009, report analysts at Megabuyte.
‘This was somewhat of an underlying decline given that Vodafone acquired Cable & Wireless Worldwide in 2012, which added about £2.1 billion in annual revenues and £370 million of EBITDA,’ said Megabuyte’s Philip Carse.
Vodafone shares have handed shareholders an average 2.65% a year return, including dividends, over the past decade, lagging even the FTSE 100’s fairly modest 6.86% annualised total return.
Vodafone has recently been linked to possible acquisitions of rival mobile network Three UK and broadband, home phone and mobile provider TalkTalk, which left the UK stock market in a take private deal orchestrated by Charles Dunstone, the company’s joint founder and, at the time, largest shareholder.
Reports earlier this month said that TalkTalk is in talks with Vodafone rival Virgin Media O2 over a possible £3 billion merger, which if true, would leave Three its only realistic UK-based target.
So far, Vodafone’s strategic rethink has included spinning off mobile masts business Vantage Towers (VTWR:ETR) as a standalone business, refocusing the portfolio through a range of disposals, and positioning the company for ever-greater consumption of data.
But without more dramatic activity, investors may become concerned about the sustainability of Vodafone’s dividend, one of its chief reasons to own the shares. Last year it paid €2.47 billion in dividends to shareholders from €2.62 billion post tax net income. [SF]
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Chart: Shares magazine • Source: Refinitiv
Coca-Cola provides new demonstration of its pricing power in Q2
Latest numbers sees the soft drink manufacturer materially increase its 2022 growth forecast
Soft drinks manufacturer Coca-Cola (KO:NYSE) once again demonstrated its ability to offset surging input costs with price increases in its second quarter results (26 July).
The company raised its full-year revenue growth forecast by a material amount despite increased costs for aluminium cans and corn syrup.
Coca-Cola now expects organic revenue to increase 12% to 13% in 2022 compared with previous expectations for a 7% to 8% increase.
The latest quarter saw net revenue rise 12% to $11.3 billion compared with the $10.55 billion pencilled in by analysts.
Unlike big ticket items, which are proving difficult to shift given cost of living pressures, it seems people are far less likely to cut back on impulse purchases like a can of Coke, even if they have to pay a bit more.
The appeal of Coke’s core brands with consumers also means they are far less likely to trade down to cheaper alternatives.
The resilience of the business has been reflected in its share price performance so far in 2022. Its shares are up nearly 5% year-to-date compared with a fall of more than 17% for the S&P 500.
Based on consensus forecasts, the shares trade on a forward price to earnings multiple of a little more than 24 times. [TS]
Abcam deals big blow to UK investors in battle to list growth companies
The UK government is trying to promote London, Cambridge and Oxford as a global life sciences hubx
The AIM market looks set to lose its largest listed company after life science research tools supplier Abcam (ABC:AIM) said (20 July) it intends to cancel its UK listing to focus on a sole US listing.
Abcam said it will put the proposal to a shareholder vote later this year. Although only 10% of the company’s shares trade on Nasdaq, volumes have doubled since listing in October 2020, and now represent a quarter of total liquidity.
The company revolutionised the way that research scientists can source and purchase antibodies online and strong growth of the business has turned it into one of AIM’s biggest success stories.
Despite the shares trading around a fifth below all-time highs, shareholders have been richly rewarded over the years, with the shares increasing around 29-fold from their listing price in 2005.
This represents a compound annual growth rate of 22% a year excluding dividends paid along the way. Before the company suspended them during the pandemic, dividends had grown by nearly 25% a year since 2006.
If shareholders vote through the delisting, Abcam will become the latest example of the battle between the world’s largest exchanges to attract the best growth companies.
A fellow Cambridge success story, computer chip designer ARM was due to return to the London stock market before its current owner Softbank put the deal on ice due to political uncertainty. [MGam]
Link report reveals 40% UK dividend growth for Q2 but also concentration risk
Dividend increases have mainly come from three sectors – oil & gas, mining and banks
The second quarter Link UK Dividend Monitor has revealed the high concentration risk facing UK income investors.
Three quarters of the dividend growth in the second quarter came from the mining, oil and bank sectors.
Looking forward mining dividends, which have been the most significant driver of dividend growth during the last two years, may well have peaked.
UK dividends have also benefited from sterling weakness.
UK dividends had a very good second quarter.
The headline total jumped 38.6% year-on-year to £37 billion. Large one-off special payments were a key driver, but the underlying picture was strong.
Underlying dividends, which exclude volatile special dividend payments, jumped by 27% to £32 billion.
This was the second-largest quarterly total on record, for both headline and underlying figures, just shy of the all-time record reached in the second quarter of 2019.
STERLING WEAKNESS LIFTS DIVIDEND RETURNS
It is important to note that UK dividend performance was boosted by the weak pound.
In the second quarter, two fifths of the total dividends paid were denominated in US dollars, generating an exchange rate boost of £1.4 billion to their sterling value.
For the full year, the pound’s weakness is set to add £3.5 billion to £4.5 billion to the total.
In a recent in-house interview David Smith, manager of the Henderson High Income Trust (HHI), outlined the fund’s strategy.
The £266 million trust which is currently trading on a 1.5% discount to net asset value (NAV), invests in a prudently diversified selection of both larger and smaller companies.
It aims to provide investors with a high dividend income stream (the trust currently yields 9.08%), whilst also maintaining the prospect of capital growth.
The trust has the ability to own bonds and as Smith highlights ‘companies have to look after bond holders over equity holders’ which means bond coupons are more resilient than equity dividends.
Commenting on the Link report Smith said: ‘Although economic headwinds are building, UK companies generally have robust balance sheets while the rebasing of dividends during the pandemic has resulted in better dividend cover, hence companies are in stronger financial health to weather any potential slowdown, making current dividend levels for the UK market more sustainable.’ [MGar]
UK dividends (full year basis)
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Source: Link Group
