Thursday 02/08/18

  1. In UK RETAIL NEWS TODAY, House of Fraser is in danger, Debenhams gets its credit rating downgraded and Next announces strong sales
  2. In VEHICLE-RELATED NEWS, VW unveils cracking results, Tesla targets profits and Didi considers buying bike-share start-up Ofo
  3. In OTHER NEWS, I bring you an amazing new bridge. For more details, read on…



So House of Fraser’s future looks shaky, Debenhams gets a ratings cut and Next benefits from summer sales…

House of Fraser on the brink of collapse (The Times, Deirdre Hipwell) shows how the venerable department store is close to collapse after Chinese investor, C Banner (which owns Hamleys) pulled out of a deal to save it after issuing a profit warning yesterday. The race is now on to find someone willing to take it on – and Mike Ashley’s Sports Direct and turnaround specialist Alteri are rumoured to be in the running. * SO WHAT? * If House of Fraser fails to find a saviour, it could become the biggest casualty on the UK high street since BHS and Woolworths. Roughly 17,000 staff work at HoF – 5,000 employed directly by it and the rest who work for the concessions. House of Horrors is currently trying to negotiate a company voluntary arrangement (CVA) to shut 31 of its 59 stores – and you’d think that any potential suitor would want to know the outcome of THAT before fully committing. Sports Direct currently owns an 11% stake in House of Fraser and is said to have offered to invest £50m either via a loan or equity injection. It sounds like Mike Ashley’s ragbag of investments in cr*p companies is on the verge of getting bigger. He already owns a decent stake in Debenhams – another pile of cr*p! As I keep saying, I believe that department stores are an anachronism and that they are in 



terminal decline. IMHO, they need to drastically repurpose, concentrate on providing an attractive and compelling retail experience as well as downsize or diversify in order to survive in the long term.

Talking of which, Ratings blow for Debenhams (Daily Telegraph, Ben Woods) shows that ratings agency Moody’s has downgraded the troubled department store chain from B1 to B2 following a slew of profit warnings as it has continued to suffer from sluggish consumer spending and tough competition. * SO WHAT? * Moody’s is hardly reinventing the wheel by downgrading this retailer, but it just puts even more pressure on a company that has been getting a kicking for quite some time. More evidence of what I was saying above in the HoF comment.

In Next swimwear and online sales make a splash amid retail gloom (Daily Telegraph, Jack Torrance) we see that the fashion retailer put in a better-than-expected sales performance, with the “highest summer products” like shorts, t-shirts and swimwear selling particularly strongly. Investors sold the shares yesterday, however, as the share price fell by 7.1% on disappointment that the company didn’t upgrade its full-year profit expectations. Chief exec Lord Wolfson said that retailer turmoil had helped Next to negotiate rent cuts of about 25% on leases that have come up for renewal – something that Greggs talked about a couple of days ago as well. * SO WHAT? * The fact that landlords are willing to make such big cuts in rent just shows how desperate they are getting to hang on to existing tenants. All retailers are complaining about high business rates, but nothing has been done about those just yet. You’d imagine that this would have to come next in order to stop our retail destinations from becoming ghost towns.



In vehicle-related news, VW has strong results, Tesla targets profitability and China’s Didi mulls an acquisition of Ofo…

Volkswagen posts record second-quarter results (Financial Times, Patrick McGee) heralds some good news for the embattled car manufacturer as it announced solid second quarter results yesterday but warned of a more volatile path for the rest of the year due to changes in emissions test procedures and the current threat of protectionist policies. The core VW brand did a particularly good job of turning things around but investors continue to be nervous about the impact of aluminium and steel tariffs as well as taxes on imports. The new chief executive Herbert Diess also talked yesterday about producing solid-state batteries at scale by 2025, saying that they were the natural successors of current lithium ion technology, although he did say that investment in electric vehicles would put “a burden” on margins. * SO WHAT? * This seemed to be a solid performance by VW, but it was peppered with warnings that the road ahead would not be a smooth one.

Tesla doubles loss, but burns less cash than expected (Wall Street Journal, Tim Higgins) highlights a sigh of relief from investors as founder Elon Musk reassured them that profits would come later on this year due to a significant increase in the number of Model 3 sales in the second quarter helping the company burn less cash than everyone had been expecting. He also managed to calm fears that the company was running out of money, all of which sent the shares up almost 9% in after-hours trading and said that “It took 15 years to execute on our initial goal to produce and affordable, long-range electric vehicle that

can also be highly profitable. In the second half of 2018, we expect, for the first time in our history, to become both sustainably profitable and cash flow positive”. Tesla managed, at last, to reach its 5,000 Model 3 production target in June after a number of delays, but the company now faces the challenge of sustaining and then increasing this number. * SO WHAT? * I guess investors were relieved by this more assured performance by Musk amid recent reports that he’d approached suppliers asking for money, which implied that Tesla might have to ask for more from investors. He batted that concern away yesterday, but you never know with Tesla! Let’s hope he’s right.

China’s Didi in talks to buy struggling bike-share start-up Ofo (Financial Times, Louise Lucan, Henry Sender and Yuan Yang) shows how difficult things are as the craze for dockless bike-sharing has mushroomed globally over the past few years with two companies – Alibaba-backed Ofo and soon-to-be-bought-by-food-delivery-company-Meituan-Dianping Mobike– now the last (big) ones standing. Vandalism, theft and badly maintained bikes have all been issues – as have “bike graveyards” that have proliferated across major cities. Chinese ride-hailing app Didi already has a stake in Ofo and has been rumoured to have made an offer said to value the whole company at $1.5bn. Both Ofo and Mobike have been burning cash like there’s no tomorrow ($25m and $50m per month respectively) as they have had to heavily subsidise their offerings to win new customers. * SO WHAT? * I don’t mean to sound boring or anything, but this all sounds like a disaster waiting to happen IMHO. You have two bike-sharing companies that torch huge amounts of cash every month chasing a very fickle customer base that won’t combine (because the founder of Ofo is against it) being considered for an acquisition by another company that burns cash by the truckload (Didi) in a very competitive business. Surely this could be a very precarious state of affairs, no? I would have thought that if anyone should be buying into this, it should be Alibaba. I’m just not convinced about the sustainability of this business model.



…And finally,  in other news…

I thought I’d leave you with news of this amazing bridge that opened in Vietnam in June: Whimsical new Vietnamese bridge looks like it’s held up by the hands of gods (SoraNews24, Dale Roll How amazing does this look??

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