Boohoo says demand is coming back, and Fevertree regains some fizz

“Brent crude is playing catch-up with the sharp decline seen in US oil prices earlier this week. Brent has tumbled to $17.63 a barrel which is essentially half the level at which this oil benchmark traded at the start of April,” says Russ Mould, Investment Director at AJ Bell.

“Despite the commodity price continuing to fall on Wednesday, the resources-heavy FTSE 100 index managed to move up by 1% to 5,695 thanks to strength among banks and utility companies. European markets also traded higher including a 1% gain in Germany’s Dax index.

“UK inflation fell to 1.5% in March, principally down to a decline in the price of clothing and fuel, with the data running to just before the lockdown began. Inflation is likely to fall further given the ongoing decline in oil prices, although food prices may go up."

Boohoo

“There were concerns that online fashion retailers would see a sharp drop in demand as the country went into lockdown, given that individuals no longer had a need for a new dress or shirt for a night out on the town.

“This certainly seems to have happened to Boohoo which reported a dip in trading from mid-March. Interestingly it says sales have started to pick up again despite the ongoing lockdown. One can only presume that people are bored at home and simply want the feel good factor of spending money on something new.

“There is also the consideration that people might want to look good for video conferencing, given the nation seems to have discovered Zoom and other video platforms and are now frequently communicating with friends and family that way.

“The fact that Boohoo’s website is still taking orders gives it an advantage over the high street retailers who have had to close their doors temporarily. However, there are still two negative factors which could cause it to stumble.

“Firstly, there is a risk that a likely increase in unemployment as a result of the coronavirus pandemic could hurt its customers’ ability or willingness to buy clothes at the same rate as before the crisis.

“Secondly, its model of fast fashion is rapidly going out of favour with the younger generation. The lower end of its 16 to 40-year-old target market is increasingly concerned about environmental issues. The idea that a company sells products which may only be worn once and then chucked goes against everything that many individuals in Greta Thunberg’s generation stand for. This may be a longer term headwind for the company to tackle, but the risk to earnings is very clear today.”

Fevertree

“Even before coronavirus, premium mixer drinks firm Fevertree had gone flat. Post its 2014 stock market debut it bubbled up rapidly, becoming a market darling through a string of earnings upgrades as it gained traction in the UK market.

“But by early 2020 the shares had more than halved from a valuation in late 2018 which would have put it on the fringes of the FTSE 100, if it was listed on London’s Main Market rather than AIM.

“Amid the peak of the sell-off in March it fell to its lowest point since 2016 as investors reacted to the implied loss of sales to pubs, hotels and restaurants due to coronavirus.

“However, the stock has now regained some fizz. Trading commentary alongside its full year results revealed sales through off licences, convenience shops and supermarkets spiked in the early stages of the pandemic amid a wave of stockpiling.

“More encouragingly these sales have continued to hold up (if not at the same levels) amid continuing consumption at home.

“Investors could also toast a full year dividend, an increasing rarity in the market, underpinned by the company’s touted financial strength.

“The extreme nature of the current crisis is drawing a clear dividing line between the haves and have nots and Fevertree’s doubled year-end cash pile of more than £100m puts it firmly in the ‘haves’ category.

“It also benefits from an outsourced model – with the manufacture and distribution of its product handled by others who are still able to operate without significant disruption.

“These qualities have enabled it to be a good corporate citizen. Companies are becoming increasingly aware that how they behaved during the crisis could inform how they are perceived when some degree of normality has returned, with real consequences for their prospects.

“Fevertree is looking to help on-trade customers where it can, none of its staff have been furloughed and those with spare capacity due to reduced demand are being encouraged to volunteer to help in their communities.”

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