Debenhams and Halfords

Thursday, January 10, 2019 - 09:35

“A weaker session across major markets in Europe and Asia dampens investors’ spirits including a 0.5% decline in the FTSE 100, a 0.8% drop in Germany’s DAX index, and a 1.3% slump in Japan’s Nikkei 225. “FTSE 100 miner BHP drops 6% as it trades without the right to the latest dividend and it is also caught up in general weakness across the mining sector. Consumer goods and insurance providers are also weak on the UK market on Thursday,” says Russ Mould, Investment Director at AJ Bell.

Debenhams

“Cynics who had been sharpening their knives in anticipation of another profit warning from Debenhams will be disappointed the retailer hasn’t come out with a shocker of a Christmas trading update.

“While like-for-like sales were down 3.4% in the six weeks to 5 January, you have to appreciate that expectations were already very low.

“Important is that fact that earnings are still expected to hit current market expectations, providing much needed relief for shareholders who had been fearing the worst.

“This stabilisation in trading, if you can call it that, also raises the likelihood that it will try to raise money by issuing new shares. It makes reference to bringing in new sources of funding in the trading update, so one could expect news on that front soon.

“Debenhams may have bought itself some time with the latest trading update, yet you cannot ignore that fact that its business model is less relevant in the modern world of retail.

“As such, anyone brave enough to pump new money into the company would want a cracker of a discount to the current share price in order to be adequately compensated for the risks they would be taking on.”

Halfords

“When will companies learn to stop blaming the weather for their problems? Auto parts and bike retailer Halfords attributing a big reduction in guidance given as recently at November on ‘exceptionally’ mild temperatures, even in part, is hard to justify.

“According to the Met Office the UK’s mean temperature in December 2017 was, like last month, above the long-term average but the company made no mention of this a year ago when its figures were more robust.

“And even if, as the company indicates, the weather hit sales of retail motoring products and services, it could have provided a boost on the cycling side as the mild conditions encouraged more people to get on their bikes.

“Weak consumer confidence, which is also referenced by the company, is a more likely culprit and explains why the company is similarly downbeat on the outlook for the coming financial year.

“Chief executive Graham Stapleton has been investing in customer service and training to improve the company’s proposition since his appointment in September 2017 but there have been similar efforts from his predecessors in the past.

“Perhaps the cycling boom in the UK, which boosted Halfords historically, is losing traction, or the company simply isn’t as well positioned as it should be to benefit from it.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market comment is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.