Wednesday 06/11/19

1. In MACRO & OIL NEWS, the UK service sector slows and Brazil holds a big oil auction
2. In RETAIL NEWS, Walgreens Boots Alliance eyes a massive buyout, Primark aims for US expansion, Pandora suffers from riots and Mothercare shuts down in the UK
3. In NEWS ON INDUSTRY TRENDS, seltzer looks like The Next Big Thing in beverages and EV sales rise in the UK
4. In INDIVIDUAL COMPANY NEWS, Xerox sees drama and Peloton has big losses
5. In OTHER NEWS, I bring you battered Quality Street and the right bauble-to-Christmas-tree ratio…

So the UK service sector weakens and Brazil holds a massive oil auction…

UK economy hit as service sector reports big fall in new orders (The Guardian, Phillip Inman) cites the latest service sector IHS/Markit/Cips Purchasing Managers’ Index which shows activity stagnating with Brexit uncertainty being to blame. Services companies said that export orders were particularly weak and rising import prices are squeezing profits, which is leading to staff cuts. * SO WHAT? * The services sector accounts for the majority of the UK’s annual GDP – and so if you combine that with recession in manufacturing and construction you get the UK’s weakest economic performance since the 2008 financial crash, according to IHS Markit’s chief business economist Chris Williamson.

Then in Brazil prepares for auction of deep-sea oil

deposits (Financial Times, Bryan Harris, Andres Schipani and Anjli Raval) we see that ExxonMobil, Shell and Cnooc are among the many oil majors who will be competing with each other to develop four oilfields off the south-east coast of Brazil that are thought to contain up to 15 BILLION barrels of crude oil. The Brazilian government stands to benefit to the tune of $25bn in licensing fees and billions more in production compensation. This will come in very handy for president Jair Bolsonaro, who is trying to revive the economy and encourage competition. This will be the largest oil bidding round ever and will begin today. * SO WHAT? * If these sites come through on the predictions, Brazil could become the world’s fourth biggest oil producer by the 2030s. It’s currently the world’s ninth biggest producer. This bright spot comes at a difficult time for the whole oil industry in Latin America with Mexico’s state-owned group Pemex announcing yet another quarterly loss last week and Venezuela’s continued fall in oil production (despite the country sitting on the world’s largest oil reserves). This latest development is also notable in that it signals an increased willingness on Brazil’s part to open up its energy industry to outsiders.

Wallgreens Boots Alliance has big buyout ambitions, Primark eyes US expansion, Pandora suffers from the riots and Mothercare shuts down in the UK…

In Walgreens weighs up largest buyout (Daily Telegraph, LaToya Harding) we see that the American drug store chain is considering what would be the biggest ever leveraged buyout. The company, which currently has a market value of $55bn and carries  $16.8bn of debt, has reportedly been in touch with some of the world’s biggest private equity firms on the matter. There is talk of asset disposals to boost funding as well. * SO WHAT? * I wouldn’t normally mention this sort of thing in Watson’s Daily because the parties are still in talks – but the sheer scale of this means that it is worth mentioning now to get it on your radar. I personally think that high street drug stores is a very difficult business and one that is ripe for change. It has a degree of downside protection via its prescriptions business which gets it a certain level of footfall, but then customers are often left with an uninspiring (and often cluttered) environment. If it manages to go private – for the right price – it may be easier to make more radical changes without inpatient shareholders breathing down its neck.

Primark ready to realise American dream (The Times, Ashley Armstrong) highlights Primark’s ambition to expand its chain in the US after strong sales at its store in Brooklyn, New York. Primark now accounts for half of the sales and profits of its parent company, Associated British Foods. It has 373 outlets worldwide, 189 of which are in the UK. * SO WHAT? * This was not an overnight success as Primark opened its first US store four years ago in Boston. Since then it has opened more stores and re-jigged formats to make things work and it looks like a rare British retailer success story. Let’s hope it doesn’t go the way of some of the others who had a tendency to over-expand too

quickly in a highly competitive market. Apparently, there aren’t any targets for numbers of stores opening, so they stand a chance IMO. It is interesting, though, that the company is doing SO well despite the fact that you can’t buy any of its stuff online! It just goes to show that there are exceptions to the general trend of fashion retailers finding a good balance between online and offline offerings.

Protests tarnish Pandora’s fortunes (The Times, Ashley Armstrong) shows that the ongoing political protests in Hong Kong are denting turnaround efforts at the troubled Danish jeweler as it reported lower-than-expected sales in the third quarter. It said that sales had halved in the region and the protests took the edge off its recently-announced overhaul aimed at pulling in younger shoppers after several profit warnings. Its share price fell by 15.5% at one stage yesterday as investors expressed their disappointment.

Mothercare to cease all UK trading with loss of 2,800 jobs (The Guardian, Sarah Butler) highlights the latest development in the demise of yet another high street struggler as its administrator, PwC, said that Mothercare will close all of its 79 UK stores and online business but keep its profitable overseas operations. * SO WHAT? * Mothercare stores will be closing over the next few weeks and months with the loss of 2,485 retail jobs and 384 head office and distribution staff among others. The fact that it is keeping its overseas operations will mean that the company will get to maintain its listing on the London Stock Exchange. It said that it is currently in talks with potential partners to keep its UK presence by selling its brand via other stores or websites. Given that it entered into a CVA last year, had a profit warning in July this year and failed to turnaround its performance, its downfall is hardly surprising. Things have got to be really bad on the UK high street when even Sports Direct’s Mike Ashley isn’t willing to buy them as per Ashley rules out riding to the rescue of Mothercare (Daily Telegraph, Laura Onita). As we’ve seen over the recent past, Ashley seems content to buy just any old cr*p (Evans Cycles, House of Fraser etc.) these days 😜!

There’s a new drink that’s getting everyone excited and electric car sales rise in the UK…

Alcoholic fizzy waters claw sales from beer (Financial Times, Leila Abboud) highlights a new US drinks craze for “spiked seltzers”. The new drink – made with sparkling water, cheap alcohol and fruit flavouring – is supposed to chime with 20-30-somethings’ desires to have healthier drinks using natural ingredients that have fewer carbs and calories. * SO WHAT? * Analysts at UBS believe that spiked seltzers will grow from a $550m market to $2.1bn market in the next three years and a drink called White Claw currently has a 53% market share followed by Boston Beer’s Truly that has 31%. Given its surging popularity, some of the world’s biggest beer companies are trying to come up with their own versions. Constellation Brands said it would launch a Corona-branded seltzer in four flavours

next year and MillerCoors is already selling Henry’s Hard Sparkling Water. The summer craze for this stuff has dented beer sales over the period – so this is not to be taken lightly! Although this is largely a US phenomenon at the moment, some seltzers have cropped up in the UK like Balans and Bodega Bay but many analysts think that this will spread around the world. Exciting!

One in 10 new cars sold in UK has electric or hybrid drivetrain (Daily Telegraph, Alan Tovey) cites the latest figures from the Society of Motor Manufacturers and Traders (SMMT) which show an increased appetite for electric vehicles. Stats show that 143,251 new cars were registered last month and 9.9% of them were either battery-powered or hybrids – up from 6.9% a year earlier. Sales of purely battery-powered cars were up strongly, but from a very low base. The figures also showed the continued demise of diesel, which now make up 24% of the market – it used to be over 50% before the VW dieselgate scandal hit in 2015. * SO WHAT? * Nice news but EVs are still very niche. I’d go hybrid as charging capabilities are still rubbish.

Xerox is at the centre of some interesting developments and Peloton disappoints…

It’s all going on at Xerox what with Xerox exits Fujifilm joint venture with $2.3bn sale to Japanese partner (Financial Times, Kana Inagaki) highlighting Xerox’s sale of its 25% stake in the joint venture on the one hand and Xerox considers takeover offer for HP (Wall Street Journal, Cara Lombardo) on the other. The copier-maker is thinking about making a cash and shares offer for HP, but nothing is confirmed yet. HP is currently worth about $27bn and is about three times the size of Xerox, but the latter will be getting a $2.3bn windfall from the sale of its JV stake as mentioned above. * SO WHAT? * If it goes ahead, good luck to ’em. Combining these two hardware businesses sounds like a nightmare to me – and I would expect LOADS of cuts to be made if it happened given the companies’ exposure to a very very mature business. Will they go the way of Kodak?? I don’t think so given that I think there will always be a need for printers and copy machines – but surely there will be scope for a LOT of cost-cuts given business overlap.

I really hope I am wrong but CEO John Foley in Losses put the brakes on Peloton (The Times, Robert Miller) sounds like he is so full of ***t when he says “I believe if we pulled back on growth we could be profitable tomorrow, but that is not what the board and the leadership of Peloton believes we should do”. The company sells £2,000 exercise bikes with a big touchscreen and gets users to pay a monthly fee to virtually attend its spin classes. It reported a bigger than expected loss for the quarter and wasn’t too hopeful about the full year either. The share price fell by 7.6% on the news. * SO WHAT? * OMG. This company is a complete POS (look that one up) IMHO and has to find some way of diversifying away from this bike business. I still don’t understand why people buy this – you can buy a pretty decent bike with all the gear for less than £2,000 and bike outside, £2,000 would also probably get you a few years’ worth of gym membership with all the spinning classes you could want (plus you’d get access to the gym, swimming pool etc.) or if you were serious about cycling, you could buy yourself a Wattbike (used by Olympic athletes which has TONS of data) for £1,600 or use an existing bike on a turbo trainer for a few hundred quid. Surely sooner or later people are going to realise they are just throwing money away and move onto something else?? “We are within striking distance of profitability”?? My *rse. Apologies to those of you who are Peloton fans – I just think there are far better ways of getting “bike fit”.

And finally, in other news…

We are coming to that time of year where fish & chip shops seem to feel the need to provide deep-fried festive offerings. Fish and Chip shop sells battered Quality Streets – and they’ve ranked best ones (The Mirror, Courtney Pochin https://tinyurl.com/yxfl2pca) is one example, although do you remember last year’s Chip shop serves deep-fried Christmas dinner – with battered sprouts (The Mirror, Mark Chandler https://tinyurl.com/yc5w3rdv)? Obviously, the trad Christmas dinner doesn’t have enough calories as it is 😂. And, speaking of Christmas, I thought you might find this useful: Christmas tree guide shows correct amount of decorations to get the perfect look (The Mirror, Luke Matthews https://tinyurl.com/y484bgzo). I might give this a go!