Bad News for the Housing Market and On-Line Retailers

The news in the housing sector is all bad. Banks have stopped providing mortgages and builders have stopped building houses (Redrow announced it was closing all its sites this morning). Estate agents are also giving up as nobody wants to have strangers wandering around their house and there are few new buyers. Who would look to buy a house given the economic uncertainty and with everyone’s jobs under threat? Rightmove previously announced it was discounting all its bills to agents but they have now announced that the proposed final share dividend is being cancelled.

Did you think on-line retailers might be able to continue operating? Think again. Next has announced it is temporarily closing its on-line operations including warehousing and distribution. Apparently “colleagues” feel they need to be at home. This mirrors what I have seen from a couple of smaller on-line clothing suppliers I use. They both announced closure in the last few days. Will Boohoo, ASOS and Amazon be able to continue to operate? Only supermarkets seem reasonably sure to be able to stay in business over the next few weeks.

This gloom over the country’s business status was echoed in the comments of Paul Scott on Stockopedia. He said this morning: “Hundreds of £billions in economic activity is being killed off, with ruinously expensive compensation schemes being dreamed up. For what benefit? We’re likely to end up with millions of unemployed, many thousands of destroyed businesses, all of which might have slowed down the spread of the virus a little”. He has lost confidence in the recent stock market bounce and thinks losses will be ruinously high in many companies. I agree with his comments. Certainly in many sectors it’s a question of which companies will survive the year, not whether they will make any profits or pay any dividends.

The only positive glimmer is that Anthony Bolton, who ran Fidelity’s Special Situations fund until 2007 very successfully, is apparently moving back into the market to purchase selected stocks according to an article in the Financial Times. He says “at these prices there are really interesting opportunities”. Certainly the key is to be very selective even if you believe the crisis will be over by the end of the year.

Meanwhile I am sat in the bomb shelter otherwise known as isolating at home. These are such momentous times that I decided to start writing a diary just as my father did during the second world war. It may interest my offspring in due course as reading my father’s diary did after it came to light 37 years after he died. My diary may be a much shorter one though if I catch the virus.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Debenhams PrePack, Dunelm Trading, ASOS and Privacy

Department store operator Debenhams (DEB) has been put through a pre-pack administration. It’s been bought by a new company formed by its secured lenders. Mike Ashley of Sports Direct is furious. His company invested £150 million in the shares of the company in the hope of taking it over, which will now be worthless. He had some choice words to say on the subject which included that it was an “underhand plan to steal from shareholders”, “as normal politicians and regulators fiddled while Rome burnt”, and that they “have proven to be as effective as a chocolate teapot”. I have much sympathy with Mike Ashley and the other shareholders as I have consistently criticised the use of pre-pack administrations in the past. It is an abuse of legal process. Why could it not have been put through an ordinary administration as the company appears to be a going concern, albeit with excessive debt, or Ashley’s offers considered?

Mike Ashley had previously made various offers to refinance the business including a pledge to underwrite a rights issue, but to no avail. It is not clear why his proposals were rejected, but as usual with pre-packs it is probably just a case of the lenders seeing the opportunity to make more money from a pre-pack. Ashley suggests he might try to challenge the pre-pack although that will be difficult now the deal is done.

What went wrong at Debenhams? Basically an old-fashioned retail format where sales were relatively stafic compounded by very high and onerous property leases and massive debt.

Contrast that with the trading statement from Dunelm (DNLM) this morning. This company sells home furnishings from out of town warehouse sites (not on the High Street like Debenhams) and have moved successfully into “multi-channel” operations with a growing on-line sales proportion. Overall like-for-like revenue in the third quarter is up by 9.8% with on-line sales up 32.1%.

Retailer ASOS (ASC) also announced their interim results this morning. Sales were up 14% but profits collapsed with margins declining and costs increasing while they invested heavily in technology and infrastructure. Competition in on-line fashion is increasing but you can see that such companies are taking a lot of business from High Street retailers, particularly in the younger customer age segment. The world has been changing and Debenhams has been an ex-growth business for many years. I do most of my clothes shopping, but not all, on the internet which shows even oldies are changing their shopping habits. I have never held Debenham shares although I do hold some Dunelm and have held ASOS in the past. But declining businesses with high debt are always ones to avoid however cheap the shares may appear.

Readers of my blog should be aware that after many years and growing amounts of spam I am changing all my email addresses. You can either contact me in future via the Contact page of my web site (see https://www.roliscon.com/contact.html ) or via the Contact tab on this blog.

It’s taking me some time to notify all the hundreds of organisations I am signed up with of my new email address. But that was almost frustrated when one of them sent out an email to all their clients using cc. rather than bcc. They have reported themselves to the Information Commissioner! But will they take any action? I doubt it. Thankfully the company in question used one of my older addresses which will soon be deleted. Such idiocy is not acceptable.

Another problem I am having of late is that if I mention a company or look at its web site, I then subsequently get bombarded with web advertising. So I am now seeing repeated advertisements for SuperDry products when I have absolutely no interest in such products. Despite removing cookies they still appeared. This is the kind of problem that is annoying people about the lack of privacy in the modern world and which needs tackling.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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It’s Not Just Blood on the High Street – ASOS et al

The trading statement this morning (17/12/2018) from ASOS (ASC) has caused the share price to fall by 40% at the time of writing. Other internet retailers such as Boohoo (BOO) fell in sympathy.

ASOS reported that revenue was up by 14% over the previous year, but warned that they “experienced a significant deterioration in the important trading month of November and conditions remain challenging. As a result, we have reduced our expectations for the current financial year”.

In effect the previous forecast sales growth for the year of 20 to 25 percent has been reduced to circa 15% (last year it was 25%). In addition margins are down which they blame on a “high level of discounting and promotional activity across the market” which they have reacted to by increasing their own level of promotional activity with more discounting and clearance sales.

They blame the weakening in consumer confidence driven by economic uncertainty plus unseasonably warm weather in the last three months. Weather is normally blamed by retailers for poor footfall in their shops so why should it affect internet retailers? It’s because it allegedly has reduced the average selling price of items purchased. But the really interesting aspect is that it is not just the UK that has suffered. Trading in France and Germany has also become “more challenging” with more promotional activity therefore required.

Note that I do not hold either ASOS or Boohoo although I have done in the past. Before this profit warning, ASOS was on a prospective p/e of 36 for the current financial year according to Stockopedia which I considered rather fanciful even given the high growth rates. Estimates will now be revised down substantially, the company is cutting capital expenditure which is always a negative sign, and they “continue to anticipate returning to a free cash flow positive position in FY20”. In other words they are still burning cash.

So it would seem that the dire stories about trading on the High Street is not just caused by the move to internet shopping. Both High Street and internet traders have been hit by declining consumer confidence, with the former also damaged by high business rates and increased staff costs.

There has been no Santa Claus rally in share prices as normally expected this year. It may be too soon to judge the outcome of all retail sales over the Xmas period but this news does suggest that there will be no Santa Claus effect there either. One has to question whether internet retailers such as ASOS will ever return to the heady 25% annual growth rates. There are too many companies getting in that game because there are no significant barriers to entry. Internet retail start-ups are spending money on marketing on the basis that they will make money sooner or later, but will they? Competition to the likes of ASOS and Boohoo can only increase.

A similar trend is being seen in the on-line estate agent market (Purplebricks et al) where competition is growing, some are giving up after running up losses, and nobody is making money due to high levels of marketing expenditure so as to grab market share.

These are markets where I have no urge to dabble in the shares of such companies at present.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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