Aston Martin fights back, and The Works warns again

“It’s the news many investors have been hoping for – China and the US have reportedly agreed to remove some existing tariffs,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 jumped 0.4% to 7,424 follows the reports, with miners and packaging companies among the top performers.

“One might have expected the market to spike on this news which suggests the agreement isn’t clear cut. Indeed, talk of ‘phase one’ of the agreement implies this could be a long drawn-out process, hence only a muted market reaction."

Aston Martin Lagonda

“Is this the moment luxury car manufacturer Aston Martin Lagonda finally splutters into life as a public company?

“The name behind James Bond’s favourite vehicle has left investors more shaken than stirred since its IPO in October 2018 at £19.

“It now trades at less than a quarter of that price as sales have struggled and following a $150m debt issue at an eye-watering 12% rate. Today’s third quarter results are no picnic with the company reporting a loss and revenue was down by double digits.

“However, the company is taking action on costs and at least expects to meet expectations for the full year.

“Much will now hinge on the company’s new sports utility vehicle, the DBX, being built at a facility in Wales.

“Given the position it is in, Aston Martin cannot afford it to fail. There will clearly be a lot of focus on the launch on 20 November and what can be gleaned when sales begin in the second quarter of next year.

“Keeping the firm on the road until then will be a challenge for management even if they claim to be prepared for any Brexit disruption in the interim.”

The Works

The Works’ decision to join the stock market last summer always seemed an odd one. Why float a business when investor sentiment towards the retail sector was at rock bottom? Why list a business heavily reliant on consumers walking through its doors when high street footfall continues to be weak?

“You can also ask questions as to why The Works had such an ambitious growth plan with plans for 50 net new stores a year when market conditions remain so poor. However, the retailer does say it can achieve payback on new stores in less than 12 months.

“The problem with its business model is that there are plenty of other places to buy low-cost books and toys such as supermarkets and convenience stores. Does The Works really need to exist?

“It seems that its earnings are fairly reliant on there being a big craze each year, such as the ones we’ve seen in recent years with loom bands, fidget spinners and squishies. It can capitalise on these playground crazes but they don’t tend to last very long which isn’t good for the company’s earnings visibility.

“The Works warned in July that like-for-like sales growth was likely to be below recent historic levels in the absence of a new mega trend and given the current economic environment. That’s remained the case and so we have another profit warning.

“In its defence, the company knows its target market, it provides products at attractive prices and it is finding ways to have more efficient operations such as outsourcing e-commerce fulfilment and warehousing to a third party.

“Unfortunately there is nothing unique about the business and competition is fierce offline and online. That leaves it running hard just to stand still. Unless market conditions radically improve this may not be the last time The Works delivers bad news to investors.”

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

The daily market update 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.