Thursday 13/09/18

1. In INDUSTRY-WIDE NEWS, the oil price soars amidst a perfect storm and the FDA looks at a ban on flavoured e-cigarettes
2. In RETAIL-RELATED NEWS, Inditex continues its winning streak and Sports Direct is forced to deny a Debenhams deal
3. In INDIVIDUAL COMPANY NEWS, Apple announces some fancy phones and Nio sputters on its debut
4. In OTHER NEWS, I bring you some very out-dated adverts. For more details, read on…

So the oil prices strengthens amid storms and the FDA looks at a total ban on flavoured e-cigarettes…

In Hurricane warning pushes oil price to $80 (Daily Telegraph, Jillian Ambrose) we see that the potential for threats to supply disruption have been pushing the oil price up and Gordon Gray of HSBC says that $100 per barrel oil is not out of the question, saying that “While we aren’t explicitly forecasting Brent to rise to $100 a barrel we see real risks of this happening. The fact that much higher supply is already needed from the likes of Saudi Arabia, and the low levels of spare capacity remaining, leaves the global system highly vulnerable”. * SO WHAT? * Hahaha talk about a fudge! This guy is clearly trying to hedge his bets here. If the oil price DOES go to $100 he can say “I told you so” and if it doesn’t, he can say “I never said it would” ;0). Basically, global supplies are being squeezed because Venezuelan supply has collapsed, Iran can’t take up any production slack because the US is imposing sanctions on it whilst severe outages in Libya and falling supply in Angola are also adding to lower supply just as the US is facing storms that could disrupt the Colonial Pipeline (which runs through the Carolinas) or even the Gulf of Mexico.

I highlighted this development on the Watson’s Daily Twitter page yesterday in a Wall Street Journal article, but FDA threatens a ban on flavoured cigarettes (Financial Times, Alistair Gray) shows the immediate impact on share prices that the US Federal Drug Administration’s sudden focus on vaping had on tobacco companies and vaping companies. FDA commissioner Scott Gottlieb sounded a major warning to the entire industry when he said “We’re seriously considering a policy change that would lead to the immediate removal of these flavoured products from the market” and gave e-cigarette makers 60 days to come up with a plan to combat the habit’s adoption by young people. Shares in big companies like British American Tobacco (which owns e-cigarette brand Vuse) and Marlboro-owner Altria (which owns the MarkTen brand) were up by 6% because investors were betting that they’d be able to withstand FDA pressure better than smaller companies such as Juul Labs, which is a Silicon Valley start-up that’s managed to rack up a 70% market share in e-cigarettes.

Juul is seen to be particularly attractive in the youth market and stores run by Walmart, Walgreens, 7-Eleven, BP, Shell and Mobil were amongst 1,300 outlets to receive warning letters after an undercover operation showed evidence of sales to underage customers. * SO WHAT? * This move has highlighted the tricky balancing act between helping smokers wean themselves off cigarettes and providing a potential entry route to new smokers, or as Gottlieb said in FDA considers ban of all flavoured e-cigarettes (Wall Street Journal, Jennifer Maloney) “I am willing to narrow the off-ramp for adults to close the on-ramp for kids”. Big Tobacco will easily be able to weather this current storm as they’re used to this sort of pressure plus the fact vaping is a mere pimple on the backside of their business – revenues from vapour sales in the US represent just 1% of revenues for BAT, Altria and Imperial Brands. You might think I’m sounding over-dramatic here but this could surely be the end of Juul Labs, no? They, unlike their battled-hardened tobacco brethren, are hugely exposed to whatever the FDA has to say. They are going to have to come up with a cast-iron plan in the next 60 days – and it’ll probably mute their business massively. I reckon their business will go down the tubes and some big tobacco companies will buy them for a song a few months/years down the road if they can be bothered.

In retailer-related news, Intidex puts in a solid performance and Sports Direct is forced to deny Debenhams interest…

Inditex fashions record profits and sales (The Times, Deirdre Hipwell) shows that it’s not all doom-and-gloom amongst retailers as the world’s biggest fashion retailer, which owns brands including Zara and Massimo Dutti, unveiled decent results yesterday and credited them to the success of its plan to create a better-integrated customer offering fusing offline and online capabilities. The company has managed to open new stores and drive online sales at the same time – a trick that many others have found difficult to pull off. In now has 7,422 stores in 96 countries and aims to offer online sales across all of its markets by 2020. * SO WHAT? * Good news for an excellent company IMHO. I have always liked this company because their model is so good – when others off-shored their manufacturing to far-off countries, Inditex stuck with more local production (mainly Europe) which meant turnaround time from design to on-the-peg was, as The New York Times once put it “mind-spinningly supersonic”. The shares have lost ground so far this year (down 12%) as rivals try to replicate their model and currency headwinds threaten to dent its progress as it makes most of its clothes in Europe but half of its sales come from outside the Eurozone. Having said that, the company put in a decent performance in a difficult environment and I expect it will continue to execute successfully on its online/offline optimisation plans.

Following on from all the recent Debenhams-related shenanigans, Watchdog acts after Sports Direct hints at Debenhams deal (The Guardian, Sarah Butler and Julia Kollewe) highlights the latest development in this particular drama as the Takeover Panel had to get involved after Simon Bentley, Sports Direct’s senior non-exec director, got people all hot and bothered by telling reporters after the company’s annual shareholder meeting that a takeover of Debenhams had been discussed by the board. The Takeover Panel’s involvement prompted Sports Direct to issue a formal statement saying that it did not plan on making a formal bid for the department store for six months, whilst at the same time reserving the right to make a bid if there was a “material change of circumstances” with agreement from the board or after a bid from a third party. * SO WHAT? * Well that was a bit stupid, wasn’t it – Bentley must have felt like a right kn0b. Still, it seems that my suggestion of a potential “House of Debenhams” isn’t out of the question yet! I will stick to my “prediction” that Mike Ashley’s Sports Direct can wait for Debenhams to continue to wither and pick it up for a very low price a few months/years down the line when it’s in its death throes. No doubt that bloke who owns Edinburgh Wool Mills and that other bag of assorted cr*p retailers will chuck his hat in the ring when the time comes in order to at least ramp up the price a bit but I think that putting Debenhams and House of Fraser together gives them a better chance of long-term survival rather than hoping for some kind of miraculous change in consumer behaviour. As I keep saying, I believe the whole concept of department stores needs to change completely and that anything less will be like rearranging the deckchairs on the Titanic.

In individual company news, Apple unveils three new phones and Chinese Tesla-wannabe Nio has a disappointing day…

It’s that time of the year again when Apple launches bigger, pricier iPhones (Wall Street Journal, Tripp Mickle) as the company unveiled the iPhone Xs Max (a bigger version of the iPhone X, priced at $1,099), an iPhone Xs (slightly improved version of iPhone X at $999) and the iPhone Xr (which has an edge-to-edge LCD screen and is priced at $749). Apple also unveiled a new smartwatch with a bigger screen and a new sensor that measures your heart’s electric current. * SO WHAT? * So far, so lovely. However, one of the key challenges is for Apple to help existing users part with more cash as everyone is hanging on to their handsets for longer. A bigger screen has the tendency to make people use the phone and its apps more than a smaller screen and so a shift to the larger-sized handset is intended not only to make users upgrade, but also get more money from them on an ongoing basis. Nothing to get too excited about in the short-term though.

Tencent-backed Nio fails to hit IPO fundraising target (Financial Times, Sherry Fei Ju, Louise Lucas and Peter Campbell) shows some potential worrying signs for Chinese start-ups aiming to raise money on the public markets as Tencent-back Nio managed to raise only $1bn in its IPO – just over half of the $1.8bn it was hoping for as the shares fell by as much as 15% at one point to recover to being up by 5.4% as it listed on the New York Stock Exchange. Nio has lost over $1.6bn in the last three years and has come under pressure from customers recently over various things like missed delivery deadlines and manufacturing defects and it said that costs “will increase significantly in the future”. * SO WHAT? * This disappointment will be a blow to the company, which may have to slow down its projected progress and delay its next vehicle, cut R&D spending and/or curtail other projects. Nio is 15% owned by Chinese internet giant Tencent as well as a host of other high-profile investors such as Baidu Capital, Sequoia Capital and TPG Global, so there will be no let-up in pressure on the company to crack on. I think Nio has a MASSIVE uphill task, though.

…And finally, in other news…

Given the story I mentioned earlier about e-cigarettes, I thought that this was quite topical: These are the adverts that told people smoking was good for them (Metro, Adam Smith https://tinyurl.com/ybegt3u4). Amazing (but not in a good way)!

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