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“A stronger oil price gave a welcome lift to the FTSE 100 on Tuesday, pushing up shares in Royal Dutch Shell and BP whose movements have a large influence on the overall stock market index. A stronger showing from tobacco and pharma stocks also gave support to the FTSE,” says Russ Mould, Investment Director at AJ Bell.
Next
“A big component of successfully heading up a listed company is expectations management. The game of under-promising and over-delivering is one that Next chief executive Simon Wolfson typically plays very well.
“Despite reporting a strong start to summer trading at the beginning of August, the clothing retailer left guidance for the year to January 2019 unchanged. Its justification being the expectation that shoppers had pulled forward purchases of summer clothes and that demand would peter out in August.
“This has not proved the case and the company now lifts full year profit guidance for a third time. Yet Wolfson again seems to be playing a cautious hand with his outlook.
“The company’s first half results reflect the ‘structural and cyclical’ challenges facing the high street referenced in his statement, with sales in its shops down 7% but online sales up 16.8%.
“The company has also announced some interesting initiatives including the transfer of online bestsellers into stores and a look at whether its shops could serve as delivery points for non-competing third parties, a potential way of addressing the problem of getting shoppers through the doors in the first place.”
Card Factory
“Card Factory is one of those shops where there is always a queue of people waiting to buy items and the tills are constantly ringing. The low price point for its cards and celebration items helps to lure in people off the street; it has a proven business model and is a profitable company.
“Unfortunately there has been a reduction in the number of people shopping on the high street, which lowers Card Factory’s opportunity to sell goods to shoppers and thus its earnings have taken a hit.
“Consumers are also nervous about the state of the economy in the run up to the UK leaving the EU, thus they may be watching their spending closely. That means they may think twice about buying non-essential items like Thank You cards, when they can simply do the same job via text message or email.
“Another issue to consider with Card Factory is that many of its products simply too look cheap, quality-wise. Little mistakes like the fold of a card not being precisely in the middle, or card thickness that is so flimsy you could have done a better job of producing the cards yourself on your home printer.
“While there will always be a market for cheap goods, Card Factory now has a strong enough brand to warrant producing higher quality items and charging more for them, alongside a range of cheaper items for people who want them. Yet at the moment it seems the business is slashing prices to stay competitive – which may not be the right thing to do if the profit margin is getting squeezed.
“From an investment perspective, this trickle down of earnings means cash flow cover for the much-prized dividends is getting thinner, so the days of its special dividends on top of normal ones could be numbered. Investors were originally drawn to the stock as an income play and this attraction may soon disappear.
“The one area seeing strong growth is its online channel. After all, why bother traipsing to the shops when you can buy a card from its website and have it posted for a penny less than the cost of a normal stamp?
“The cost of processing small ticket items would suggest the online channel could be less profitable for Card Factory than its physical stores, but retailers have no choice but to operate in the channels that provide the most convenience to customers.”
These articles are for information purposes only and are not a personal recommendation or advice