Wednesday 07/11/18

  1. In MACROECONOMIC NEWS, Italy edges towards recession, France and Turkey vow to defy US sanctions on Iran and the Europeans can’t agree on a digital tax
  2. In UK HIGH STREET NEWS, New Look turns a corner, Primark gains ground and Prezzo feels the pressure
  3. In INDIVIDUAL COMPANY NEWS, Papa John’s sales fall, Ralph Lauren fails to excite and Lloyds Bank cuts deeper
  4. In OTHER NEWS, I bring you a teacher’s nightmare-come-true and a Lego machine gun. For more details, read on…



So Italy nears recession, France and Turkey rebel and the EU can’t decide on digital taxes…

Italy at risk of recession as eurozone economy suffers (Daily Telegraph, Tim Wallace) cites the latest IHS Markit Purchasing Managers’ Index (PMI) survey which shows that Italy could fall into recession territory due to a drop in private sector output in October. The Eurozone’s PMI is at its weakest in over two years as Germany’s growth now trails France and Spain, but Italy’s it at its weakest level for five years. Citi economist Guillaume Menuet observed that “Slowing external demand for manufacturers and increasing uncertainty on the domestic economic outlook and economic policies are clearly weighing on Italian growth”. * SO WHAT? * No doubt Italy’s government will use this as a reason to continue to flip the EU the bird on its budget demands and say that austerity is not what the country needs right now. We’ll see soon enough whether they remain defiant or whether they cave as the deadline for budget resubmission gets closer.

Following on from US threats to punish anyone who breaks its sanctions on Iran, France vows to lead Europe in defying US on Iran sanctions (Financial Times, Jim Brunsden and Michael Peel) shows that France is taking a bold stance by setting up a special finance channel (called a “special purpose vehicle”, or SPV) to keep trade with Iran going. French economy minister, Bruno Le Maire, said that “Europe refuses to allow the US to be the trade policeman of the world” and reflected Europe’s deep frustration with Trump’s scuppering of the Iran agreement that had taken so long to put together. The SPV would allow companies to trade with Iran while financial payments would be centralised in Europe. * SO WHAT? * This SPV sounds a bit tenuous currently and is not yet set up properly so, at the moment, it looks to me like Le Maire is all mouth and no trousers. Some may see this as a way for the Euro to chart its own course in a bid to be taken as seriously as the dollar, but I think there is a lot of room here for spectacular disaster or furious back-pedalling. It’ll be interesting to see if any major EU economy jumps onto France’s bandwagon.

Turkey’s Erdogan says he’ll defy US sanctions on Iran (Wall Street Journal, David Gauthier-Villars) is an interesting stance given the Turkish president’s recent efforts to improve relations with Washington as he was pretty unequivocal when he said “We do not want to live in an imperialist world…We will absolutely not abide by such sanctions”. * SO WHAT? * Turkey gets about 50% of its oil and 20% of its gas from Iran, so you can understand where Erdogan is coming from. Although it could get oil from elsewhere, Turkey gets Iranian gas via pipelines under very long-term contracts. Turkey has, in fact, got a waiver from the US for precisely this reason so Erdogan’s robust words are kind of academic. What WILL be interesting to see, though, is what will happen to non energy-related trade with Iran that ISN’T covered by the waiver. Although Erdogan’s words kind of give his countrymen licence to defy the US, I suspect many business leaders will be reluctant to do so. As Umit Kiler, Chairman of the Iran-Turkey Business Council put it, “We have trade relations with Iran and it’s impossible to cut this link at once. But we are taking the US warning seriously”.

In EU states fail to agree plans for digital tax on tech giants (Financial Times, Mehreen Khan and Jim Brunsden) we see that efforts to agree a temporary Europe-wide tax on big online companies by the end of the year have failed. Finance ministers from Denmark, Sweden and Ireland said that they couldn’t back the plan to impose tax based on revenues on the likes of Amazon, Facebook and Google, scuppering efforts by the EU to impose a 3% tax on revenues that would effectively rake in way more money than the current tax regime which bases tax obligations on profits. Spain, Italy and the UK have all said that they will implement their own national taxes if broader agreements cannot be reached by the EU or OECD. * SO WHAT? * I think this tax is destined to fail if it is not applied UNIVERSALLY otherwise the companies concerned will just up sticks and move operations to low-tax countries (or at least countries that give them concessions). It’s all very well now to say as a country that you’ll impose this or that tax, but if companies like Facebook just decide to up and move to another country, it will be very damaging. The EU (and OECD, for that matter) needs to grow a pair and get this done.



In UK high street news, New Look’s profitability improves, Primark gains ground and Prezzo has a tough time…

New Look sales fall but profitability improves (Financial Times, Jonathan Eley) shows that the company is continuing to make progress on turning around its fortunes as profitability is improving and the rate of sales decline is slowing, according to its first half results announcement. Sales in the key womenswear lines were strong and actually ahead of the market by 5.6%, but there was room for improvement in footwear and accessories. * SO WHAT? * This comes as welcome news given that the company entered into a Company Voluntary Agreement (CVA) earlier on this year, announced closure of its China operations and will embark on a further store closure programme after Christmas. The company appears to be delivering on cost savings and going in the right direction, but let’s not get too excited – there’s still a LOT of work to be done here. At least it is heading in the right direction.

And there’s more good news for another UK apparel retailer in Primark gaining ground as rivals suffer (The Guardian, Zoe Wood) as its “cheap chic” continues to strike a cord with shoppers. It posted a modest sales increase of 1.2% in the year to  15th September despite a

tricky second half where the summer heatwave repelled some shoppers. Primark is the UK’s #3 clothing retailer after Next and M&S and does NOT sell online (unlike everyone else). George Weston, chief exec of Associated British Foods which owns Primark, gushed that “The performance in the UK was striking, with a significant increase in our share of the total clothing market”. * SO WHAT? * In contrast to New Look, Primark is aiming to INCREASE its selling space by 1m sq ft over the next year with stores planned for continental Europe and the UK, where its planned 160,000sq ft Birmingham branch will be its biggest shop to date.

Prezzo feels the pain of restructuring process with losses (Daily Telegraph, Oliver Gill) looks at another company that is going through a painful restructuring process currently. After the company shut 94 of its restaurants in February as part of a CVA that also saw rents cut by 25-50% at 57 sites – and fending off an acquisition attempt by buyout firm Carlyle – Prezzo is focusing on 186 “profitable-only restaurants”. * SO WHAT? * Given that it posted a loss before tax of £64.7m in the year to December 2017 versus a profit of £5.3m over the same period in 2016, it still has quite some way to go before it can take its foot off the gas. Chief exec Karen Jones pointed out that “The 2017 results are a reflection of the effects of the headwinds facing the casual dining sector and the performance and shape of the business during that year, not as it is today”.



In other news snippets today, Papa John’s continues to suffer, Ralph Lauren fails to excite and Lloyds Bank cuts even more staff…

Papa John’s sales fall for fourth consecutive quarter (Wall Street Journal, Julie Jargon) shows that the company’s woes are continuing as it announced declining sales for the fourth quarter in a row, adding to pressure to do something drastic to turn things around. The company’s troubles all started late last year when founder John Schnatter made comments that were interpreted as being racist as he criticised the NFL’s handling of its players’ national anthem protests. He then stepped down as CEO from the pizza business he founded in 1984 in December and then relinquished his post as chairman after saying the “N” word during a marketing call in July. * SO WHAT? * The vultures are circling as they can smell blood here. OK, so the founder is toxic and still holds 31% of the shares, but there is surely upside to be had if an acquisition can be made at the right price. There are a number of potential buyers here, so this will be a story that will continue to unfold.

Ralph Lauren weighed down by sluggish store sales (Wall Street Journal, Suzanne Kapner) shows that, despite increasing marketing spend by 30% in the latest

quarter to celebrate its 50th anniversary, same-store sales actually declined in North America, although overall revenues were up by 1.6%. Although the shares fell 6.6% in trading yesterday following the news, they have actually gone up by 32% on the year. The company is trying to reposition itself to appeal to a younger audience and is expanding its sales channels currently. Chief exec Patrice Louvet said that these moves are showing signs of working as online searches for the “Ralph Lauren” brand were up strongly, according to Google Analytics.

Meanwhile, back home in Blighty, Lloyds sheds 6,000 roles in digital overhaul (The Times, Katherine Griffiths and Patrick Hosking) makes for unwelcome reading if you are an employee of the bank, as the bank tries to get more digital. So far, it has axed 65,000 staff since 2009 – which excludes the 9,000 they got rid of when its TSB offshoot was sold off as part of the taxpayer bailout. The bank said that it would, on the other side, create 8,240 jobs in digital banking that would create a net 2,000 jobs over time and thinks that about 75% of the new roles can be filled by existing staff (although that has been described by critics as “totally unrealistic”). Since the bailout following the financial crisis, Royal Bank of Scotland has cut headcount from 200,000 to 70,000, Barclays from 135,000 to 80,000 and HSBC from 295,000 to 234,000. On the other side, Standard Chartered has increased headcount from 75,000 to 86,000 over the same period. * SO WHAT? * You can see why being a bank manager is not quite the career it once was…



And finally, in other news…

Today, I thought I’d bring to your attention what must be many teachers’ nightmare scenario in Teacher accidentally plays p0rn to entire class full of students (Metro, Harley Tamplin Oh dear. On a slightly higher brow note (but it’s only slightly higher brow), this is pretty impressive: Japanese Lego genius rigs up a working machine gun made of plastic blocks (SoraNews24, Katy Kelly I must confess that I watched “Lego Masters” on Channel 4 last night – they should definitely set THIS as a challenge!

Some of today’s market, commodity & currency moves (as at 0753hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq *DAX *CAC-40 *Nikkei **Shanghai **
7,041 (-0.89%)25,635 (+0.68%)2,755 (+0.63%)7,37611,484 (-0.09%)5,075 (-0.51%)22,086 (-0.28%)2,641 (-0.68%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

(markets with an * are at yesterday’s close, ** are at today’s close)