The Week Ahead: UK and US Q2 GDP, EU CPI, US PCE, Next and Boohoo results
|- UK Q2 GDP (final) – 30/09 – although the UK economy got off to a good start to the year with a 0.8% expansion in Q1, the performance since then has been disappointing, not least because of the surging cost of energy which has added to the costs of business as well as everyday living. The 54% rise in energy costs that we saw in April has seen a marked slowdown in economic performance, and a sharp contraction in margins. It also constrained consumer budgets as more people prioritised spending on food and energy to the exclusion of more discretionary items. This was illustrated in the -0.2% contraction seen in personal consumption in the initial iteration of UK Q2 GDP, which pulled the economy into a contraction of -0.1%. A lot of the reason for the decline in Q2 GDP was down to the lifting of covid restrictions in health and social work, which reduced services activities by 0.4%. This appears to be reflected in the government spending numbers which declined -2.9%, while business investment rose more than expected by 3.8%. Without that, the UK economy would have probably avoided a contraction. None of this changes the fact that the Q3 performance is likely to be equally as poor, which probably means that the UK is already in a technical recession, although we won’t know for sure for another few weeks when the initial Q3 GDP numbers are released.
- EU flash CPI (Sep) – 30/09 – August saw another record for EU CPI, rising from 8.9% to 9.1% with core prices also rising, pushing up to 4.3%. The September numbers aren’t expected to be any different, with the pressure on business to pass price increases on reflected in an absolutely shocking German PPI number last week which saw factory gate prices rise by an absolutely staggering 45.8%. Some of this is now starting to feed into core prices. The eye-watering rises we are seeing in PPI is also increasing the pressure on the ECB to hike rates more aggressively as well, which presents problems all by itself. Expectations are for headline CPI to rise to 9.5% and core prices to rise to 4.7%
- US Personal spending (Aug) – 30/09 – we saw a big fall in personal spending in July to 0.1% from 1.1% in June. This sharp fall was manifested itself into a -0.4% fall in retail sales, only the second time this year the US consumer has pulled back on the purse strings. It perhaps shouldn’t be too surprising given how high gasoline prices were in the summer months which squeezed consumer incomes. Nonetheless it is becoming apparent that consumers are starting to cut back on spending if the recent numbers from US retailers are any guide, with profit warnings from the likes of Walmart and Target, who have warned that consumers are prioritising food and energy over higher margin items. It is also notable that consumer credit slowed in July as interest rates continued to rise. So far this year personal spending hasn’t seen a negative month. Could August mark the beginning of a turn?
- US PCE Core Deflator (Aug) – 30/09 – having seen the Fed raise rates by another 75bps/100bps last week in response to a rise in core CPI, it’s interesting to note that the Feds preferred measure of inflation has been falling since peaking at 5.3% in February. In July we slipped back from 4.8% in June to 4.6% and the lowest level this year, with little sign that inflation was becoming embedded, although it could be argued it has started to look a little sticky. With only two more meetings this year the big discussion now will be over whether we see another 75bps in November, or whether signs of a slowdown prompt a slower pace of 50bps moves as we head into year end. Expectations are for PCE Core Deflator to edge higher to 4.8%, with a stronger number prompting a lean towards another 75bps. PCE Deflator is expected to rise from 6.3% to 6.5%.
- US Q2 GDP – 29/09 – the most recent iteration saw US Q2 GDP revised up from -0.9% to -0.6%, still a technical recession but at least a significant improvement on the -1.9% seen in Q1. Most of this improvement was driven by personal consumption which was revised higher by 0.5% from 1% to 1.5%. One of the reasons for the decline in economic output has been supply chain disruptions which has meant that a lot of products haven’t been finished or are snarled up in ports due to lockdowns or other such reasons. This week’s final iteration isn’t expected to change the headline number that much.
- German IFO (Sep) – 26/09 – In July the IFO business climate fell back to its lowest levels since June 2020, at 88.7, as the economy started to reopen post Covid lockdown. With all the problems the German economy is facing alongside the falling river levels on the Rhine it’s not likely to be a surprise to see a further deterioration here with the only question being as to by how much. In August we only saw a modest decline to 88.5, which when you look at the impact energy prices have had on German industry has to be some kind of miracle. In August PPI rose 7.9% in a single month, and 45.8% year on year. Against that kind of inflationary pressure its amazing business confidence isn’t back at May 2020 levels. Economic expectations have been much more pessimistic, rooted down at 80.3, the last 2 months, with only April 2020 providing a lower number, when the German economy was locked down.
- Saga H1 23 – 27/09 – it’s not been a good year for the Saga share price, with its travel business underperforming, specifically its cruise ship operation which has been buffeted by covid disruptions and where activity has struggled to return to normal. When the company reported at the end of its last fiscal year, the outlook looked more positive with 86% load factor bookings for H1 and 73% for the full year. At the time Saga said it expects to return to profit in the new fiscal year, after returning a loss of £23.5m in 2022, with the hope that demand for travel and cruises recovers to more normal levels. The insurance business traded in line with expectations, although profits were lower due to increased marketing spend. In July Saga said that it remained on track to deliver an underlying profit for the current fiscal year, with the full year load factor expected to rise to 75%. Bookings for 2023/24 were currently running at 34%. The insurance business was disappointing with motor and home insurance policy sales, running 9% behind the same period due to a slowing in new business. Saga says it remains on track to deliver a return to profit this year, with underlying profit before tax expected to be between £35-50m.
- Boohoo H1 23 – 28/09 – it’s not been a great year for Boohoo shares, trading down near 6-year lows, after reporting an 8% decline in Q1 revenues to £445.7m, back in June. The main drag came from its US and European businesses which saw declines of 28% and 9% respectively. At the end of last year Boohoo said it hoped it would be able to consolidate its market share gains, however it looks like the reverse is happening, although Boohoo did keep its full year outlook unchanged. The impact of higher costs and lower margins showed up in its profit numbers from last year, seeing a 94% decline to £7.8m, even though full year revenues rose by 14% to £1.98bn. CEO John Lyttle blamed a significant increase in outbound carriage costs, and a rise in inbound shipping costs which impacted EBITDA to the tune of £60m. The retailer also paid out £261.5m in capex as it looks to expand and automate its distribution network, with a new centre expected to open in the US in 2024.
- Next PLC – H1 23 – 29/09 – while this year has been a tale of woe for general retail, Next’s numbers have managed to hold up well even if the share price hasn’t. Investors don’t appear to be differentiating between a retailer that is performing well and one that isn’t. They are all getting clobbered with the shares over 25% down year to date. At the beginning of August Next said that full price sales were up 5% and £50m ahead of previous guidance, with the retailer saying that the unusually warm temperatures during June and July prompting a jump in spending on summer clothing. Sales in retail stores have recovered, while online sales have reverted towards their longer-term average. The company retained its full price sales guidance for the year; however, it raised its full year profit guidance by £10m to £860m. Given the slide in retail sales seen during August one has to question as to whether Next might have cause to rethink this guidance, as it looks towards the second half of this year.
- Nike – Q1 23 - 29/09 – in Q3 Nike was able to generate profits of $1.4bn due to a better-than-expected performance from its US operations, while its Vietnam operations were also back to normal after facing covid related disruption earlier in the year. In Q4 the various problems in China were expected to act as a brake on demand in its markets there, while supply chain disruptions were causing inventory levels to remain higher than normal. Nike’s withdrawal from Russia and Ukraine only served to add to these problems. Nonetheless the company was still able to deliver better than expected numbers in Q4, delivering $12.23bn in revenue and profits of $1.44bn or $0.90c a share. The biggest hit to its numbers came from its China operation where sales were down to $1.56bn, a fall of 19%. While these numbers were still down on last year due to the effect of higher costs, the company still went ahead and delivered a new four year $18bn share buyback program. Shares took a tumble last week on concerns that the hit to its China business could see an even bigger decline to the 19% fall in revenues seen at the end of Q4 last year. Total revenues for 2022, were up 5% at $46.7bn. For Q1 the company says it expects revenues to be flat to slightly up versus last year, despite the disruptions in China, and elevated freight and other costs. It also expects to continue to grow its direct to customer business and away from wholesalers, a trend that has been improving over the last few quarters. Profits are expected to come in at $0.95c a share.
- Bed Bath & Beyond Q2 23– 29/09 – has found itself caught up in the meme stock craze, its shares soared in August from $7 to $30, aided by a short squeeze as investors looked towards a strategic update at the end of August. This short squeeze came to an abrupt halt after Ryan Cohen, the company’s biggest investor at the time used the opportunity to sell his entire 9.8% stake in the business, with the shares falling back below $10 just as quickly. The shares have stabilised somewhat since the volatility in August, however the strategic update announced at the end of August doesn’t appear to have restored confidence in the outlook for the business. The strategic update saw the company announce that it sees a Q2 sales decline of 26%, while announcing the closure of 150 stores and significant job losses, including senior management positions, including the COO and chief store officer. It also said it reserved the right to sell and issue new shares from time to time in order to help it to pay down its debt levels, as well as for other general corporate purposes. Q1 sales fell 25% while the business lost $358m. As part of the August update the company also said it had agreed new financing deals of more than $500m as it looks to cut down on admin costs by around $250m, as it looks to turn around the ailing business. Losses are expected to come in at $1.55c a share.
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