Tesco is a Christmas winner and Boohoo faces cost headwinds

“The FTSE 100 made modest gains on Thursday as a measure of calm returned to stock markets after a volatile start to the New Year,” says AJ Bell Investment Director Russ Mould.

“On a busy day for corporate news, investors were continuing to look past the current difficult situation with the second wave of the coronavirus to the brighter future promised by the roll-out of vaccines.

“Reports of a stream of summer holiday bookings suggest consumers are also looking ahead. In the here and now the retail sector continues to strain under the impact of lockdown 3.0 with Card Factory warning of a covenant breach and Primark-owner Associated British Foods expecting a £1 billion hit associated with the latest Covid restrictions.

“Online retailers and those deemed essential like Tesco and Halfords continue to prosper in relative terms.

“In the US, eyes were also on the future. Incumbent President Donald Trump may have been impeached for a second time but it is his elected successor Joe Biden’s reported plan to unveil a new $2 trillion Covid-19 relief package which is interesting the market.”

Tesco

“It’s a hard slog running a supermarket when so many more people have been forced to cook from home instead of going out for meals or picking them up on the go. Like many of its peers, Tesco has done an incredible job keeping its shelves stocked and doing everything it can to boost its capacity to fulfil more online orders.

“The results are laid bare in its latest update which shows decent like-for-like sales growth over the Christmas period in nearly all parts of the business.

“Covid-related costs have gone up, acting as an important reminder that the extra demand for food and drink isn’t all pure profit.

“What’s beneficial to the business is the fact we’re seeing a live stress test play out. If anyone ever questioned whether Tesco could cope under pressure from a significant change in circumstances, the answer is firmly ‘yes’.

“Stress tests tend to be a short exercise, but this one has been playing out for 10 months and it keeps taking a new direction, such as supermarkets now cracking down on the use of face masks and the impact that will have on trade and getting staff to make sure people follow the rule.

“Supermarket workers are under a lot of stress because of the higher demand for products as well as the unfortunate abuse from some customers. Therefore, management deserves a lot of credit for keeping the ship steady.

“Against this resilience, one cannot ignore the problems within Tesco’s wholesale business, Booker. Flat like-for-like sales in the third quarter, weak Christmas trading and a like-for-like sales decline over the past 19 weeks goes to show that some factors are out of Tesco’s hands. Booker is likely to struggle for as long as lockdown restrictions remain in place. And as for Tesco Bank, the less said about it, the better.”

Boohoo

“Taken purely at face value the latest trading update from online retailer Boohoo looks good with full year revenue guidance increased after 40% growth in the third quarter, ahead of consensus forecasts.

“However, context is key, and sales growth has actually decelerated slightly from the first half of its financial year.

“Boohoo endured a mixed 2020 – on the one hand the pandemic saw it take share from struggling traditional high street names, some of which it snapped up like Oasis and Warehouse.

“It is forging ahead with plans to expand warehouse capacity in the UK and it has been mentioned as a possible bidder for other retail brands – notably those owned by the crumbling Arcadia empire such as TopShop and Dorothy Perkins.

“On the other hand its reputation was rocked by a supply chain scandal linked to factories in Leicester from which it sourced clothes.

“Addressing problems with its suppliers is almost certain to mean an increase in costs and there are other pressures on this side of the equation too, particularly the impact of Brexit on its trade in mainland Europe.

“The decision to leave margin guidance unchanged, despite benefiting from a period which saw a proportionally lower level of returns as the prospect of queuing at the post office became less appealing due to Covid, is telling.

“The human and environmental impact of cheap, disposable fashion could increasingly jar with its youthful demographic for whom social and green issues are important.

“These issues are increasingly important to the market too and despite making some changes to its board, Boohoo also faces shareholder pressure over corporate governance.

“Notably it lost a mainstream auditor in PwC, which quit over reputational fears, and appointed a much smaller accountancy firm PKF Littlejohn before Christmas. The company still has a lot more to do to fix these issues.”

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.