Wednesday 01/08/18

  1. In MACROECONOMIC NEWS TODAY, the Eurozone economy shows signs of slowing down
  2. In RETAIL NEWS, Zara innovates and Greggs gets rent concessions 
  3. In TECH NEWS, Apple gets within touching distance of being a $1tn company, Samsung suffers from cooling phone demand, Baidu unveils strong results and Sony gets a boost from its PlayStation
  4. In OTHER NEWS, ee bah goom – it’s Yorkshire Day today! For more details, read on…



So things are getting a bit sluggish in the Eurozone…

Worry grows as colour drains from eurozone (The Times, Tom Knowles) cites figures from Eurostat, the eurozone’s statistics agency, which show that the 19-nation bloc is slowing down after a strong 2017 – so much so that Britain is now expected to overtake it in the second quarter – 0.4% GDP growth (expected) versus 0.3% for the eurozone. The eurozone benefitted last year from strong



exports amidst buzzing global trade. A separate report published by the European Commission earlier this week found that confidence in the eurozone economy fell to its lowest level in almost a year last month as export orders and production expectations fell. As Fabio Balboni, an economist at HSBC put it, “Last year’s growth was unsustainable, fuelled by a spectacular external environment, with net trade contributing for about half of the annual growth seen in the last quarter of 2017”. * SO WHAT? * This sort of news is coming at a rather inconvenient time for eurozoners as they are caught in the middle of a trade war with the US and Brexit negotiations. You can see why the ECB is holding off raising the zero per cent interest rate although the decision to rein in QE may prove to be questionable timing-wise.



In retail news, Zara continues to innovate by repurposing shops whilst Greggs gets rent cuts…

Out of stock online? Zara hopes shipping from stores will boost sales (Wall Street Journal, Jeannette Neumann) shows the retailer’s willingness to innovate in order to keep winning on the high street as it is tooling up its stores to ship online purchases in a bid to boost sales by getting items to customers more quickly than getting them delivered from a warehouse. This means that, for instance, if an item is out of stock online but is available at a store close to where the potential purchaser lives, the new ship-from-store option could speed the item to the online shopper’s address. This capability will be rolled out to 2,000 stores in 48 countries, making it one of the most ambitious attempts by an apparel company to rejig its physical shops to be able to fulfil online orders. * SO WHAT? * Some retailers, such as Gap and JC Penney, have already rolled out similar initiatives, but others have experienced difficulty in executing similar plans because they have lacked the requisite tech to track in-store and in-warehouse inventory accurately. This is a very interesting development instigated by the world’s biggest fashion retailer by sales (and by that, I mean Inditex – Zara’s 

parent company) that I am sure will be closely monitored by others. The thinking behind this is that the quick convenience offered by this new service will increase the likelihood of a full-price sale, whilst simultaneously streaming online and store inventory together more efficiently will result in lower levels of overstock which triggers markdowns. It’ll be interesting to see how well this all works in practice, but if it proves to be a hit it could revive the utility of having a physical presence on the high street.

Meanwhile, High street woes serve up rent cuts for bakery chain Greggs (Daily Telegraph, Ben Woods) gives us a snapshot of how things are going at the UK purveyor of naughty treats as business has proved to be robust in the face of extreme weather and tough conditions on the high street. Chief exec Roger Whiteside observed that “With retailing coming under pressure and more and more retail units becoming vacant, then that increases supply. People want us to stay and we are able to negotiate favourable terms to that. Of late, that has included substantial rent reductions”. Although the company remains cautious on its outlook, investors were loving it and the shares rose by 9.6% on the results. * SO WHAT? * Things continue to be tricky on the high street and Greggs is big enough to have sufficient customer drawing-power that it can get special concessions like this. Others won’t be so lucky, however – although if they know that rent concessions are out there, it might give others hope to try and negotiate something similar which could help. The fact that landlords are willing to do this just goes to show how desperate things are getting.



In tech news, Baidu has solid results, Apple edges closer to the $1tn mark, Samsung suffers smartphone fatigue and Sony benefits from its PS4…

On the one hand, US tech sell-off sweeps up China bellwethers (Financial Times, Louise Lucas and Hudson Lockett) paints a mixed picture of tech as it highlights the recent Facebook and Twitter sell off, which now appears to be spreading to Chinese giants such as Tencent, which has fallen a substantial 25% since the beginning of this year. The weakness in Chinese tech stocks is being largely driven by the current trade war with the US, weaker currency and tightening liquidity. On the other hand, Baidu reports strong quarterly results (Wall Street Journal, Maria Armental) showed a certain amount of robustness as revenues reached record levels in the June quarter due to an uptick in its search-engine business, which is driven by artificial intelligence (AI). AI is a major driver for Baidu as it powers search and newsfeeds, developments in autonomous driving and voice-activated internet. * SO WHAT? * I have to say that I’m not convinced that this slide is a long-term thing. At the end of the day, these are companies that operate in areas that the Chinese government are keen to promote and they are selling predominantly to a largely captive domestic audience hungry for their products. I think any current weakness is a blip in the scheme of things and given the stellar performance the respective share prices have had, it’s probably about time for a pause for breath.

Continuing on a positive note, Apple closes in on trillion dollar status (The Times, Robert Miller) highlights Apple’s results that were unveiled yesterday. Sales of the iPhone (which accounts for two-thirds of the company’s revenues) fell slightly short of analyst expectations, but revenues from its services business – which includes the App Store, Apple Music and iCloud – exceeded them. Shares were up by 3.7% in after-hours trading on the news, taking the market cap of the company to $960bn at $203.45 a share. Chief exec Tim Cook gushed “we’re thrilled to report Apple’s best June quarter ever and our fourth consecutive quarter of double-digit revenue growth. Our third quarter results were driven by continued strong sales of iPhone, services and wearables and we are very

excited about the products and services in our pipeline”. * SO WHAT? * Demand for high-end smartphones continues to stagnate, so it’s good news that Apple’s services business continues to fire on all cylinders. Phone sales are still key to sentiment and direction, but I am sure that the services division still has quite a lot of room for growth as Apple increases revenues from its installed user base.

In Cooling phone demand weighs on Samsung despite chip boost (Daily Telegraph, Margi Murphy) we see that Samsung Electronics’ mobile business recorded it steepest profit decline since the first quarter of 2017 as sluggish demand for expensive high-end mobile phones generally dragged down the sales of its flagship S9 and S9+ phones. On the other hand, the company experienced strong demand for its memory chips and high end TVs. Samsung announced that it is to push out a new phablet – the Galaxy Note 9 – earlier than expected to take advantage of the pre-Christmas boost. * SO WHAT? * This is Samsung’s first decline in profits for seven straight quarters. Although semiconductor sales were strong, there are increasing concerns that the price of Nand flash memory chips – used for longer-term data storage – have already peaked out as prices have halved from the level they reached in 2017. If this is the case, along with the maturing of the smartphone market – the immediate future could be tricky for the company. Investors don’t seem to be giving it the benefit of the doubt as it has already fallen by about 10% this year, making it one of the worst performers in 2018 among global technology shares. Let’s hope that the take-up of its Internet of Things products increases and that its new phablet doesn’t spontaneously combust like the Note 7 did!

Sony’s profit soars on PlayStation strength (Wall Street Journal, Takashi Mochizuki) heralds some good news for the Japanese consumer electronics company as it reported another strong quarter for earnings, driven by solid sales of electronics hardware, a good performance by its PlayStation videogame business and demand for smartphone camera components. The company’s earnings were also boosted this quarter by the sale of some its stake in Spotify. * SO WHAT? * Although Sony’s smartphone business remains a drag as it is way behind the likes of Apple’s iPhone and Samsung’s Galaxy phones, everything else seems to be on track under the stewardship of the company’s new chief exec Kenichiro Yoshida. It sounds to me like they should ditch the smartphone business and just discount it as a lost cause. If smartphone supremos Samsung and Apple are finding it hard, Sony certainly isn’t going to bring anything to the table. I think it’s better off providing content and parts for smartphones rather than making its own devices.



…And finally, in other news…

How will you be celebrating Yorkshire Day today?? There are a few ideas in: Yorkshire Day 2018: events to celebrate the occasion around the county (The Yorkshire Post, Claire Schofield I must say that the flat cap flinging and Yorkshire pudding tossing sound quite good…

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