Royal Mail gets parcel surge, and JD Sports comes out on top

“It’s not often that we see the UK as being ahead of other markets in Europe, but that’s the situation on Tuesday. The FTSE 100 jumped 0.5% to 5,964 whereas all the other major European indices fell,” says Russ Mould, Investment Director at AJ Bell.

“Helping the FTSE once more was sustained weakness in the pound, giving a boost to the many overseas-focused companies in the index. Driving the market was a set of corporate results with plenty of news to excite investors. JD Sports, DS Smith and Experian top the list of risers thanks to positive news on trading and, in one case, dividends.

“Housebuilders continued to fall as more investors digested recent news that various sector constituents are being investigated over the way leaseholds were sold.

“Asian stocks pressed ahead, including a 0.7% rise in Shanghai’s SE Composite where financials, utilities and energy companies were in strong demand, suggesting that investors were digging around for pockets of value in the market.”

Royal Mail

“There are some welcome bits of good news in Royal Mail’s trading update but in usual fashion there is plenty to worry about for the future.

“It seems we became a nation addicted to online shopping during lockdown with delivery vans accounting for a large amount of traffic up and down the streets. People were ordering essential items as they adhered to Government advice to stay indoors where possible, as well as buying various treats for themselves.

“Royal Mail’s 34% growth in parcel volumes for the five months to 30 August just goes to show how the company has benefited from the boom in e-commerce. However you only have to look out your window to see countless vans with other delivery brands also doing well, confirming the fact that competition remains fierce for parcels.

“The ongoing demise in letters being posted is a weight around Royal Mail’s neck. The once plentiful source of revenue is drying up and it still has legacy issues that are preventing the business from becoming more efficient. For example, redundant letting sorting machines are taking up space that could be better used and it is still fighting with unions over outdated working practices.

“If facing an uphill battle to implement modern working standards clouds the business, there is an even bigger storm on the horizon in the form of the recession, the impact of international postal rates have recently gone up by a very large amount, and uncertainties around cross border trade from Brexit.

“The business knows how it wants to reinvent itself, there are just too many conflicting factors stopping it from happening.”

JD Sports Fashion

“In the last decade or so JD Sports has been the star turn in the retail sector. It has shown its rivals a clean set of heels as it identified and targeted a youthful demographic with disposable income and tapped into the athleisure trend of wearing trainers and tracksuits to socialise, work and work out.

“Agreements with sought-after brands like Adidas and Nike have helped reinforce its position. These strengths were to the fore as it only reported a 7% drop in sales year-on-year in the six months to 1 August.

“When you consider this performance coincided almost exactly with the onset of the coronavirus pandemic that is a notable achievement and has the coda that full-year profit guidance is above expectations. The simple fact of restoring guidance in itself will reassure the market.

“It demonstrates that JD Sports is on top of the things you need to be a successful retailer in the 2020s, in particular being able to sell its product as readily online as it does in its shops.

“The big shift to web-based sales did bring with it extra costs, so profit dropped a lot more than revenue. However, the business has adapted creditably to an unprecedented set of circumstances.

“What comes after the current financial year is open to question. Part of its target market could be vulnerable to unemployment, particularly assuming the furlough scheme in the UK ends as planned in October.

“But with the company’s clear retail expertise and a very strong balance sheet it should be a sector survivor.”

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