Monday 10/09/18

1. In MACROECONOMIC NEWS, we take a quick look at the Swedish election
2. In RETAIL NEWS, Wall Street cuts retailer profit forecasts, UK retail slows down, John Lewis sheds staff and Debenhams looks to rehab
3. In INDIVIDUAL COMPANY NEWS, Apple aims for larger screens, 888 goes to America and Royal Mail cites subscription as the way to go
4. In OTHER NEWS, I bring you a culinary monstrosity and an interesting way of restocking a lake. For more details, read on…

So the Swedish election nears a result…

I’m not going to dwell on this too long as the final result will be out soon enough but Sweden’s ruling party holds slender lead in poll (Financial Times, Richard Milne) looks at the current state of play in Sweden’s  

parliamentary election. Basically, the ruling centre-left party is just ahead of the centre-right, whilst the nationalist anti-immigration Sweden Democrats isn’t making as much ground as everyone had thought they would. * SO WHAT? * Although it doesn’t look like the populists will win outright, they have attracted a significant chunk of the vote so far (17.6%) which will give them influence in parliament and they look on track to be the biggest gainers since the 2014 elections. This election has been billed as one of the most important in generations as Sweden seems to be shifting from its usual liberal stance and reputation for having a generous welfare state to being more wary of immigration and less keen on subsidies.

In retail news, Wall Street downgrades retailers, UK retailers continue to struggle whilst John Lewis sheds jobs and Debenhams considers long-term survival…

Wall Street cuts profits forecasts for dozens of US retailers (Financial Times, Alistair Gray and Mamta Badkar) highlights the large number of cuts in analyst forecasts on US retailers, bringing into question their continued profitability despite a decent economic backdrop where consumers are spending. Simeon Siegel, an analyst at Instinet, remarked that “The pendulum swung too far: retail never died, but it’s likely not as healthy as people think, either. After a very strong first half, it would seem management teams feel the need to reset the bar, to bring hype back to reality”. Reasons behind the forecast cuts include higher costs of e-commerce and investment in store upgrades as well as a shorter financial year versus 2017 but they stand in stark contrast to Amazon, whose profit estimates for the current quarter have nigh on doubled in the last three months. Retailers who have seen their forecasts cut include department store Macy’s and home improvement group Lowe’s, but the biggest ones have obviously been in strugglers such as department store JC Penney and Victoria’s Secret owner L Brands. * SO WHAT? * It seems to me that the sector as a whole should benefit from a buoyant US consumer, but then every retailer has its own story to overlay on that as well. Those that are doing well, but using this upswing as an opportunity to enhance their offering (such as Tiffany, which is renovating its flagship store in Manhattan), will no doubt benefit in the not-too-distant future by enhancing the in-store experience whilst others continue to suffer with varying degrees of Amazonophobia.

On the other hand, Retailers left in a sweat as heat slows down shoppers (The Times, Alex Ralph) cites figures produced by the British Retail Consortium which show that footfall in physical shops fell by 1.6% versus August 2017 – double the fall in July. * SO WHAT? * It does go to show that there is such a thing as too much sun, I guess! These figures would seem to back up the ones I mentioned in Friday’s edition of the Daily from accountants BDO and show that the World Cup and sunny weather boosts were only temporary as consumers continue to have a cautious outlook.

The gloom continues for UK department stores in Profits slump sees 1,800 people made redundant at John Lewis (The Guardian, Sarah Butler) although the company said it also created new jobs, including the 600 for its new Westfield store in White City. In all, it employs 83,000 staff. It is expected to report zero profit when it announces its results this Thursday and is currently cutting costs at head office, freezing investment in new stores, reviewing its pension options and cutting marketing spend whilst also channelling £500m per year to refreshing its stores, website and new product and services development. Mind you, it could be worse as per Struggling Debenhams seeks restructure (The Times, Alex Ralph) as it turns out that the department store has asked KPMG to look at its strategic options which could include giving back excess store space to landlords or entering into a CVA. Debenhams is clearly trying to imply that this is all part of the daily retail rough-and-tumble (a company spokesperson said that “Like all companies, Debenhams frequently works with different advisers on various projects in the normal course of business”) but hedge funds smell blood as the company is currently the second most shorted stock on the London Stock Exchange. * SO WHAT? * I’d have John Lewis any day of the week over Debenhams as at least John Lewis/Waitrose has a properly defined niche (more affluent consumers who value service and the in-store experience). Debenhams, on the other hand, has b*gger all. It looks to me like it’s getting cheaper by the day as a prospect for Mike Ashley, who currently holds a chunk of the stock and recently bought House of Fraser in a fire sale for a bargain. Surely, it’s only a matter of time before we see “House of Debenhams”, no? FWIW, I reckon that he should wait until Debenhams gets REALLY cheap, buy it, merge it with House of Fraser, get rid of any extraneous store estate and sell the whole lot on. I still think that he could do something quite interesting with House of Fraser (or “House of Debenhams” if it ever happens) given the store locations and his other businesses in sports retail and gyms, but IMHO he could make a faster buck by not doing all the revamp himself. Having said that, I think that buying department stores now for someone like Ashley – while they are at very depressed levels – is a once-in-a-lifetime opportunity to get such a big prime-location footprint and could be the foundation for something quite transformational. For instance I think it’d be great if, say, he turned the massive floor space into a sort of a self-contained lifestyle zone where you have some of the traditional department store area turned into a mix of offices, gyms, residential and franchises. This would inject a buzz into tired city centres and make each location self-sustaining, which would have a halo effect on the surrounding area. Anyway, for now, things continue to look gloomy for UK department stores.

In individual company news, Apple looks at bigger screens, 888 goes stateside and the Royal Mail cites the subscription trend as a growth area…

Apple banks on bigger screens to drive iPhone growth (Wall Street Journal, Tripp Mickle) looks ahead to Apple’s announcement this Wednesday of its new iPhone line-up which is expected to include a “lower-priced” 6.1 inch device with an LCD display, a more expensive 6.5 inch model with OLED tech and an improved version of its iPhone X with a faster processor. The most notable feature of these phones will be the larger screen size – which is great for Apple because larger phones have a bigger margin (they don’t cost much more for Apple to produce, but they can charge around $100 more to the end customer) and it encourages people to use their phones more which, in turn, helps Apple’s services and apps business. According to Kantar Worldpanel research, users with smartphone screens of 6 inches or more tend to use twice as many apps as those with 5.5inch screens! They are also 62% more likely to play games and twice as likely to consume video on a daily basis than those on smaller screens. * SO WHAT? * This should keep the Apple machine chugging along nicely as phones continue to drive two-thirds of company revenues. However, smartphone sales are slowing overall as users hold on to their phones for longer, so keeping users engaged with compelling apps is going to be even more important as time goes on. Fortunately for Apple, its services business, which includes app sales, subscriptions and other offerings, is one of its fastest-growing areas to the extent that Morgan Stanley believes that this division will account for 60% of the company’s revenue growth over the next five years. This stands in contrast to the iPhone accounting for 86% of sales growth over the previous five years according to Morgan Stanley estimates.

Webb betting company 888 is latest to expand US activity (Daily Telegraph, Iain Withers and Oliver Gill) heralds the company’s launch of a sports site in the US as British gambling firms continue to expand their stateside interests following the May ruling in the US Supreme Court which overturned a nationwide ban on sports betting that had been in force for 26 years. Stocks in British firms such as 888, Paddy Power Betfair and William Hill rose sharply when the news came out as it represented a potentially chunky and relatively-unexpected growth area. * SO WHAT? * This is good news on the face of it, but the magnitude of the growth opportunity will depend very much on how far individual state legislation goes in interpreting this. Growth could be clipped, for example, if online betting is banned so that gambling can only go on at racetracks or casinos – but it’s too early to tell at the moment. Mind you, according to investment bank Moelis & Co, if gambling was completely legalised in all 50 states, the market could be worth between $20-25bn a year. Worth a punt, eh?

Further to my mild slagging off of the Royal Mail last week, Royal Mail sees beauty of new subscription delivery model (The Times) looks at an area of growth for the company as it forecasts that deliveries of goods via subscription (e.g. male-grooming stuff such as the Dollar Shave Club etc.) will double by 2022 and “offers an opportunity for existing businesses and budding entrepreneurs to get out there and offer their own services”, according to a company spokesman. * SO WHAT? * It certainly FEELS like a growth area for the Royal Mail (a recent survey said that 25% of consumers are already signed up to a subscription service and they are particularly popular in the under-35s age demographic), but my impression is that it’s more start-up driven – which is potentially more volatile. This sounds great, but Royal Mail ain’t the only delivery company on the block. In contrast to its apparent optimism, I would suggest that the momentum will move away from them towards their customers as continued expansion of Amazon’s fearsome delivery capabilities will lead to more intensified competition business that they CAN win (from the likes of UPS and FedEx etc.) which could result in pressure on margins.

…And finally, in other news…

I suspect that this is either going to make you want to gag or fill you with feelings of yearning: People are eating this ‘chippy tea pizza’ with mushy peas and curry sauce (Metro, Kate Buck https://tinyurl.com/yahjuv5r). I’m more in the former camp than the latter on this…

AND FINALLY, I thought I’d leave you with something quite surprising in Thousands of fish dropped out of planes to restock remote lakes (Metro, Lucy Middleton https://tinyurl.com/yacympbq). Wow!

As always, thank you for reading Watson’s Daily!