Sainsbury’s and Superdry

“News that Conservative MPs will vote later today on whether or not Theresa May should remain as their leader failed to knock markets off course. The pound nudged slightly higher to $1.2544 after May came out with fighting talk. “The UK-focused FTSE 250 index moved 0.1% higher to 17,677 and the more international-focused FTSE 100 index advanced 0.4% to 6,835. “Many stocks with large amounts of UK earnings pushed ahead including various housebuilders and insurers, plus some of the names which fell earlier this week on fears that the Labour party was growing in popularity. These included Royal Mail and the utilities sector which Labour has previously threatened to renationalise if it got into the power,” said Russ Mould, Investment Director at AJ Bell.

Sainsbury’s

“Getting such a big and complex transaction over the line was never going to be an easy task and today’s announcement from Sainsbury’s reveals just how tricky its £15bn combination with Asda is proving.

“Like an overworked school child asking for an extension on their homework, the supermarket is forced to plead for more time to respond to material from the Competition and Markets Authority as an investigation into the merger continues.

“Today’s update and the CMA’s previous indication that the deal could result in higher prices and a lower quality of service for consumers do not offer the most encouraging signs on how things might progress from here.

“Investors may begin to question Sainsbury’s management more strongly on the merits of pressing ahead with the tie-up, given the demands it places on their time and resources. If the CMA rules against the deal then it is fair to say their credibility will be in tatters.

“Scale is important in the groceries sector but given the structural challenges faced by the industry, size certainly isn’t everything.

“Maybe Sainsbury’s would be better off staying smaller but getting smarter in the way it responds to the needs of shoppers.”

Superdry

“Expectations were already low for Superdry given mild weather having a negative impact on coats and jackets which are key revenue drivers for the retailer. However, its half year results are even worse than expected, prompting questions as to whether the business has really lost its way.

“Former chief executive Julian Dunkerton has made his thoughts very clear in recent weeks that the current management have made several strategic mistakes and that he should have his old job back. He criticises the decision to reduce product lines and have the same product in store, online and in wholesale.

“The half year results show falling sales in its physical stores, a deterioration in gross profit margins and operating margins; a massive drop in profit and no growth in the dividend.

“The consensus forecast among analysts for the half year results was £408.5m revenue and £13.6m pre-tax profit. Actual revenue was 1% better but pre-tax profit was 5% worse.

“At the end of the day you have to ask: does the public still want to wear its products? Its brand is associated with clothes that have Japanese writing on them. That seems like a fad which may have peaked.

“Superdry should really think about how to differentiate itself from the competition, such as through product quality, superior levels of customer service and stores that offer a pleasant shopping experience. It needs to be more creative and give customers plenty of choice.

“The retailer’s share price is now down 81% in the past 12 months. Shareholders will be fuming, including Dunkerton who maintains a decent sized stake. Perhaps activist investors will target the business and back Dunkerton in trying to save the business.”

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