Rolls-Royce to cut jobs and focus more on defence market, and Marks & Spencer readies next stage in turnaround plan

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“After a flurry of optimism in recent sessions, investors were struggling to keep their hopes up about a rapid return to normal life,” says Russ Mould, Investment Director at AJ Bell.

“Wednesday saw stocks fall across many markets including a 0.6% decline in the FTSE 100 to 5,964, weighed down by weakness in banking, insurance and consumer cyclical stocks.

“Hopes about a possible coronavirus vaccine were dampened by a scientific report which cast doubt over Moderna’s drug candidate. Markets had previously rallied on hype around the potential treatment.

“European markets fell by up to 1.3% while there was a mixed performance in Asia. Hong Kong’s Hang Seng index slipped 0.1% while Japan’s Nikkei index advanced 0.8% thanks to strong gains from the energy and healthcare sectors, with the top riser being a 16% rally from electronics maker Furukawa Electric on reported better than expected results.

“The pound fell 0.15% against the US dollar to $1.2232 while the gold price nudged up 0.2% to $1,747 per ounce."

Rolls-Royce

“While job cuts had been widely trailed at Rolls-Royce, the decision to lay off more than 15% of its global workforce still carries weight and highlights the damage coronavirus is doing to the company.

“Rolls is at the sharp end of the crisis given the importance of civil aerospace work to the business. A model built on maintenance and spares and repairs contracts on an installed base of engines doesn’t work when said engines are not in use and orders for the planes which take its engines have collapsed.

“Cutting that number of staff in itself will be a big effort, costing hundreds of millions of pounds and could come with political complications given most of its aerospace activities are based in the UK.

“The long-term implications of such lay-offs should not be underestimated either. If or when the aviation sector takes flight once more, Rolls might need to recruit and train a whole raft of new people, affecting the pace of its own recovery.

“Rolls doesn’t have the luxury of looking too far ahead; for now it simply needs to keep itself in the air while it tries to navigate extreme market turbulence.

“Due to a significant crossover in the skills and expertise required, many companies operate across the spectrum of defence and commercial aerospace and it sounds like Rolls will try and shift some of its aerospace capacity towards defence – a part of the group which is so far unaffected by the pandemic.”

Marks & Spencer

“Seemingly forever stuck in turnaround mode, the latest results from Marks & Spencer provide a few interesting snippets about the business.

“Its food business is more profitable than its clothing arm, a reflection of how it has cracked the proposition for the former and continues to disappoint with the latter.

“It is going to sell core clothing items via its Ocado online grocery joint venture, meaning customers will be able to get pants and socks with their Percy Pigs sweets and avocados. That makes perfect sense and it should be an easy win for Marks & Spencer, particularly as margins are likely to be much higher on clothes.

“If fewer people are visiting its stores for clothing essentials, this is a chance to cross-sell items with little effort as people go through the checkout process for their online food shop.

“Separate to the online grocery offering which launches in September, it is going to sell third party clothing products online to broaden its appeal and drive web sales. This tactic is already being used by Next and has been trialled by H&M. The challenge here is not to dilute the appeal of its own clothes.

“With all of these initiatives Marks & Spencer’s opportunity to succeed rests on its ability to offer the products customers want and deliver them as efficiently as possible.”

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