21 September 2017
Week in Brief:BUSINESS AND THE CITY
NEVER KNOWINGLY OVERPROFITEERING: It’s shaping up to be a very mixed summer of results from retail, with fashion chains, department chains, and food retailing all seeing big variations in performance. Latest results to surprise the market are from that British favourite John Lewis Partnership, (including Waitrose, its upmarket food and supermarket chain) who announced that first half profits in 2017 were half those of the same period last year. JLP saw sales up a couple of percent, with good results from womenswear and from beauty products, but operating profits 10% down, which after some heavy costs for restructuring of operations (£21m) hit the bottom line dramatically. And no help from Waitrose which is feeling some consumer resistance on prices as premium end competition hots up; profits were down over 8% and there were some restructuring costs there too. However JLP made some promising noises about the department store business where customer loyalty is holding up and those restructuring costs should pay off in lower ongoing costs in the future. WM Morrison who also reported half year results also said customers were focussing on value, especially own brands – but that was bringing some former customers back and helping Morrison through strength in its own brand goods. That meant profits up 40% – from a lowish base admittedly.
AND THERE’S MORE: Specialist fashion results continue to give a very mixed picture. French Connection had a bad year last time and is not out of the red yet; it lost £5.7m in the six months to end of July this year and turnover is down £1m, but costs have been cut, underperforming stores have been closed, and the losses reflect the costs of getting back to what Stephen Marks, the chairman and founder of the business, said should soon be profitable trading. Mr Marks has a new incentive plan to make sure he performs and a quarter of the business is now owned by Mike Ashley of Sports Direct who knows a thing or two about cost control. Meanwhile at TK Maxx, the specialist fashion discounter, things are not looking so good. Sales were up a tiny percentage on like-for-like figures, it says in its UK results for last year (to 31st January 2017) and profits were down by £31m. The business is still in expansion mode, opening 24 new shops last year, the cost of which is weighing on performance, but not so much, the business says, as a general rise in salary levels in the UK. And Next, regarded as one of the best run of the fashion chains, also said it expected profits to be up as customer spending was looking promising, albeit the pound was causing continuing pressure on costs of imported stock. Next did say that the present trading position was showing some fragility and that investors should not get overexcited. The share price rose 12% anyway…
LEATHER SEATS OR A CREDIT CARD? The latest figures from the car industry to cause astonishment are not to do with emissions or power sources, but finance. The collective European car industry has a loan portfolio of around €400bn – that is not what it owes, but what its customers owe it for finance deals on (mostly) new cars. Traditionally if you wanted a new car and couldn’t quite stretch to the machine of your dreams you went and talked nicely to your bank manager – or in reality filled in an on-line application and hoped your credit score was OK. Then the car companies, who as retailers tend to have strong cash flow, realised that this was a business they could fill; and they have. So much so that long ago they had to fund the business by turning themselves into quasi banks – getting banking licenses, taking deposits, and issuing bonds to help fund their ever growing loan books. The main players are the three big German car builders – Volkswagen, BMW, and Daimler (Mercedes), and also Renault, but most car companies have some activity in this business. Indeed Ford in the USA has long had a sophisticated financial service operation. Margins on car loans are very attractive whilst competition to sell cars is very tough – so finance has become a major source of profits for the car builders. But it is increasingly becoming a major headache for financial regulators who worry about the carmen’s expertise, their exposure to one product, and a risk strategy that depends on the used car market providing continuing exits for maturing loans. The increasing rate of depreciation of diesel cars is just an instance of where a structural risk can come back to bite on what looks like a safe loan. Growth in car company finance has now run at over 10% per annum for three consecutive years which is the sort of rate of growth regulators start to worry about. Maybe time to get that new car on order while the money is still there.
LONGER LIFE: At least your car should have a reasonable life, if only to ensure the finance company gets its money back. Not so, you may think, your printer or washing machine, or even your socks. You are probably right – many of these products are built to have a limited lifespan. Of course, to an extent all products are built for a limited life and could go on much longer if they were built more robustly, but the sale price would then make them inaccessible to most buyers. But some products are alleged to have particularly short lives and home printers are one that is frequently mentioned – not least as replacement ink cartridges can be almost as expensive as buying a new printer. Those cartridges you may have noticed have another odd feature – when they signal you electronically that they are empty often they have quite a lot of ink still in them. But so far the only country to tackle this problem is France, where in 2015 a law was introduced to make it an offence to deliberately limit the lifespan of a product, where it could be extended at minimal cost. So far there have been no prosecutions under this law – alleging what the maker is doing is one thing, proving it is entirely another – but all four major printer manufacturers are now being sued in a French version of a class action, alleging that they make their printers for unnecessarily short lives. No UK politician has yet taken up the cause – maybe their printers are out of ink – but the European Commission is now considering similar legislation in the EU.
KEY MARKET INDICES:
(as at 19th September 2017; comments refer to net changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, (unchanged): 3 month 0.33% (rise); 5 yr 0.99% (rise).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.13% (rise)
US$: 1 mth 1.24% (steady); 3 mth 1.32% (slight rise); 5 year 1.86% (rise)
Currency Exchanges:
£/Euro: 1.13, £ rising
£/$: 1.35, £ strengthening
Euro/$: 1.20 € slightly stronger
Commodities:
Gold, oz: $1,328 slight fall
Aluminium, tonne: $2,100 slight rise
Copper, tonne: $6,736 slight fall
Iron Ore, tonne: $75.22, fall
Oil, Brent Crude barrel: $54.30 rise
Wheat, tonne: £142, fall
London Stock Exchange: FTSE 100: 7,404 (steady). FTSE Allshare: 4,057 (steady)
Briefly:
Last week’s comment would do just as well for this week. Sterling interest rates continued to move up on talk that the Bank of England will soon try to move Base Rate up, with five year rates especially moving out – 20% up in a couple of weeks. The pound continued its rally against the dollar, and, marginally, against the euro. But everything else looked weak and drifting, though oil moved up a little.
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