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“A massive sell-off in retail stocks weighs on the FTSE 100 and FTSE 250 indices with investors worried about disappointing Christmas trading. Mining stocks bucked the trend with a small advance. This included BHP which confirmed details of a $1.02 per share special dividend linked to the sale of its onshore US assets. Markets were also weak in Europe. “It seems investors are increasingly losing hope of a stock market rally going into Christmas. They simply want the final run of trading sessions to be over, so they can put their feet up in front of the fire with a mince pie and not think about the damage to their investment portfolio until the festive season is over,” says Russ Mould, Investment Director at AJ Bell.
ASOS
“The vehemence of the response to today’s profit warning from online fashion retailer ASOS reflects several key factors.
“First, this is generally what happens when a company which is priced for growth fails to deliver. Prior to today’s big sell-off, the shares were trading on a forward earnings multiple of around 40-times. This left little margin for error.
“Second, and perhaps more importantly given this is why many of the company’s listed peers are also under the cosh, today’s news suggests the retail sector is both cyclically and structurally challenged.
“Or in other words, it is not just that we’ve stopped shopping on the high street, it is that we’re spending less overall.
“Everyone knew bricks and mortar retail was in trouble; after all, why struggle out to the shops and battle the crowds when everything you want is available at the click of a button from the comfort of your own home?
“The read-through from ASOS’s results is that consumers are feeling sufficiently nervous to put off purchases no matter how they make them. This will strike fear into other internet-based retailers and more traditional rivals who were banking on their web-based portals to get them out of trouble.
“The alternative, which seems unlikely but can’t be ruled out entirely, is that this is more of an ASOS-specific issue. Fashion is fickle and perhaps ASOS was not quite as on top of what its shoppers want as it has been historically. Interestingly, BooHoo has put out a statement which says its own trading remains strong.
“With just a week left of crucial Christmas trading we should have our answer to whether this is a micro or macro issue as January trading updates trickle in from across the sector.”
SSE
“SSE’s retail merger plan with Npower looked complicated from the start and it’s perhaps no surprise that the deal is off. The utility provider will now look at spinning off its retail arm – the bit that was going to merge with Npower – or sell it.
“The big utility companies are under pressure from an incoming price cap on standard variable tariffs, as well as rising competition from independent operators who are gobbling up market share.
“The increasing ease with which you can switch providers has also contributed to the mass exodus of customers from the big utility firms.
“However, eight small energy providers have stopped trading this year, potentially switching consumers’ focus back to the larger utilities as the public starts to question if small suppliers can deliver uninterrupted energy.
“SSE’s retail arm is set to see operating profit margins more than halve in the current financial year, according to company guidance in November, because of competitive pressures and the anticipated impact of the price cap from 1 January 2019. It said margins would fall from 6.8% in the year to 31 March 2018, to a range of 2% to 3% in the current year, and then fall further in the subsequent year.
“Its primary interest is now regulated networks and renewables, hence why it seems eager to distance itself from the retail operations.”
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