Monday 30/09/19

1. In INDUSTRY NEWS, shale oil production plateaus and UK challenger banks fade
2. In RETAIL NEWS, Barneys attracts buyer interest, Forever 21 files for bankruptcy, Miss Selfridge posts a loss, Ted Baker looks like it will ask for money, Mamas & Papas edges closer to a sale and we look at what happens to ex-retailers
3. In INDIVIDUAL COMPANY NEWS, VW faces a massive legal claim
4. In OTHER NEWS, I bring you the world’s longest water slide…

So shale oil production slows and UK challenger banks lose momentum…

Shale boom is slowing just when the world needs oil most (Wall Street Journal, Christopher M.Matthews and Rebecca Elliott) contends that the recent attack on Saudi Arabia’s oil production has exposed the slowing momentum of the US shale boom. US oil production has only increased by 1% in the first six months of the year versus 7% growth over the same period last year, according to the Energy Department. This has been due to a mix of operational issues like drilling wells too close to each other as well as less dramatic technological advances in shale oil production. James West, an MD at investment bank Evercore, observed that “We’re getting closer to peak production and we are reaching the peak of the general physics of these wells”. * SO WHAT? * US shale oil now makes up around 10% of worldwide oil production and has helped to insulate the US – and the world – from geopolitical supply shocks such as the one we saw recently. The point here is that the rate of shale production growth looks likely to slow down as things stand, especially if the oil price continues to stay around the $60 a barrel level (which is unattractive from a profitability point of view for small and midsize shale producers). Even if the price rises from here, producers are unlikely to ramp up production significantly as they got burned in the past by doing so too quickly, only to watch the price fall. This means that they will be aiming to maximise production from existing wells.

UK’s bank challengers are fading in fight with big four (Financial Times, Nicholas Megaw) highlights the difficulties facing the UK’s challenger banks who were meant to take the fight to the lumbering incumbents with their funky offerings. Last week, Santander blamed increased regulation and Brexit concerns for its poor performance, Metro bank saw its share price crater by 30% last week due to a pulled bond sale and CYBG (owner of Clydesdale Bank, Yorkshire Bank and Virgin Money) has seen its share price almost halve since its peak in April. Although their collective arrival was supposed to shake up the sector, it doesn’t appear to have done so as the top six banks accounted for 80% of personal current accounts in 2000 – a figure that has since risen to 87% in 2017! * SO WHAT? * The problem here is that although banking licences have been doled out by the Bank of England, they have been accompanied with extremely stringent regulation which has made it difficult to grow. Although banks and trade groups like UK Finance have been lobbying for a relaxation of the rules to make things easier for the smaller operators, it is unlikely that anything will happen in the short term. On the downside, it would be fair to say that some of the banks have shot themselves in the foot – Metro’s woes were sparked by an admission that it had misclassified loans, which led to a confidence problem, and CYBG was too optimistic in its forecasts – but then optimists say that the new banks are innovating away from traditional lending and exploring new areas such as recurring fees for things like insurance and share-trading etc. A lack of branches also affords them a lower cost base making it easier for them to expand into new areas – but in the meantime, stellar growth appears to be limited in scope. There’s still time, but if things continue to look lacklustre surely there will be a need for consolidation to revive their collective fortunes.

Barneys gets buyer interest, Forever 21 files for bankruptcy, Miss Selfridge reports a big loss, Ted Baker looks like it may ask for cash, Mamas & Papas explores a sale and we see what happens to all those ex-shop workers…

Luxury retailer Barneys receives interest from potential buyers (Wall Street Journal, Soma Biswas) heralds some potentially good news for the ailing department store as it gets a deadline extension to find bidders. It filed for bankruptcy in August after a massive rent hike at its flagship Manhattan store, so finding a buyer will be key to its long-term survival.

Then, at the other end of the scale, Forever 21, teen-focused retailer, files for bankruptcy (Wall Street Journal, Soma Biswas) highlights the problems of the cheap’n cheerful fashion retailer as it filed for bankruptcy protection yesterday and announced the closure of hundreds of its stores from a current portfolio of 800 outlets. * SO WHAT? * Forever 21 swam against the tide by opening bigger shops when competitors were moving to smaller ones and their client base continued to buy more online, which ultimately led to the company’s demise. In addition to US closures, the company will shut most of its Asian and European outlets but continue operations in Mexico and Latin America. It’s just the latest casualty of the ongoing migration of its customers buying more online.

In the UK, Miss Selfridge reports £17.5m loss as store closures continue (The Guardian, Sarah Butler) shows that things still aren’t going well for the youth fashion chain as it made write-downs on loss-making stores and weaker sales. Its parent company, Arcadia, said that Miss Selfridge will mainly sell online in future and is continuing its programme of store closures (which included the closure of its flagship Oxford Street store). Ted Baker investors on the alert for a cash call (Daily Telegraph, Laura Onita) highlights an upcoming roadshow of the company’s top management due after it unveils its half-year results this Thursday, prompting one major shareholder to guess that Ted Baker could be aiming to ask for cash. This all comes amid rumours that founder Ray Kelvin is plotting a comeback (he still owns 35% of the company) and taking the company private. Kelvin is still facing allegations of sexual harassment and the share price is at a six-year low,

having fallen by over 30% so far this year. * SO WHAT? * Everything seems to have gone a bit quiet for Kelvin of late – and, given all the negative publicity from the sexual harassment allegations, it would seem like a decent enough idea to take the company private IF he really was planning a comeback because it would give Kelvin the chance to build up his reputation again without the scrutiny that goes with running a public company. It seems to me that Ted Baker just hasn’t been the same without Kelvin and that he still needs to be the one calling the shots for it to survive. Taking it private would probably be the best course of action from here – but it will cost a lot of money (although it seems to be getting cheaper by the day). Obviously, his return is just speculation at this stage.

Continuing with the gloom, Taking baby steps to company sale (The Times, Ashley Armstrong) shows that the private equity firm-0wned babyware store Mamas & Papas has hired advisers to find a buyer for the business as the high street continues to implode. This comes only five years after the company entered into a CVA after which the retailer shut half of its shops. * SO WHAT? * What is it about babyware shops these days? Mothercare is continuing to have problems and formerly big brand Kiddicare (eventually bought by Dunelm in 2016) finally disappeared earlier this year. Maybe the prospect of trailing around a shop whilst pregnant or with screaming kids has made parents and parents-to-be more eager to shop from the relative tranquility of their own homes. Who knows where a buyer will come from – another private equity firm perhaps?? Whoever it is will certainly have their work cut out.

Given all of the above, you do wonder where all the ex-employees go when retailers shut down. How the crisis in UK retailing is reshaping employment (Financial Times, Jonathan Eley and Robert Wright) points out that about 57,000  jobs were lost in the UK over the last year in retail, the UK’s biggest private sector employer with over 3m workers. The sector has been hit badly by the increase in online shopping, falling consumer confidence and higher overheads (minimum wage increases and higher wages generally due to a tight labour market etc) among other things. Data from the Office for National Statistics suggests that ex-retail employees have migrated to restaurants, hotels and other service sectors but research by the Local Data Company suggests that the uptick in these areas is unlikely to be able to absorb all the workers. The labour market will continue to evolve, but for now it remains tight and it seems that workers displaced by a slimming down of the retail sector are finding jobs. Let’s hope this continues.

VW faces a very very big legal claim…

VW facing the largest collective legal claim in modern German history (Financial Times, Joe Miller) heralds a big day for VW as it will find out the final number of claimants who have signed up to a landmark collective lawsuit over

omissions test cheating today. Lawyers for VW think this case could carry on for four years, go through the Supreme Court, and then get dismissed. However, this will be the first time new “class action” legislation (known as “declaratory model action” or DMA) will be brought to bear in the country that brought it in because of the “Dieselgate” scandal. * SO WHAT? * VW will obviously try to drag the whole thing out to increase the number of claimants giving up – but today will be a line in the sand.

And finally, in other news…

I thought I’d leave you today with something that sounds like a LOT of fun: Slip slidin’ away: record-breaking Malaysian water chute unveiled (msn.com, https://tinyurl.com/y4o59yqw). The water slide goes for 1,111m and takes four minutes to descend! It sounds great, no?? If you can’t get there and want to see what it’s like, have a look at this video!