Boohoo sales growth has a sour taste, and Shell to streamline

“A very bitter first Presidential debate between incumbent Donald Trump and challenger Joe Biden was short on policy and long on insults so was largely seen as having changed few minds or revealed anything to excite or disturb the markets,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 was broadly unchanged despite mixed trading in Asian markets overnight and European markets were also pretty flat. Shell was the top riser on the index as it announced plans for between 7,000 and 9,000 job cuts by 2022 while catering giant Compass was firmly lower as it revealed a £100 million impairment linked to Covid and revealed fears about the impact of new restrictions.

“Caesars Entertainment’s takeover of William Hill increasingly looks a done deal as the board of the latter recommends its offer – the big existing joint venture between the two probably makes this a one-horse race despite the additional interest of private equity firm Apollo.”

Boohoo

“The juggernaut that is Boohoo keeps on trucking despite plenty of obstacles on the road. The supply chain scandal has seemingly failed to stop people ordering clothes at a ferocious rate with 45% sales growth in its first-half period, ahead of analyst consensus for 30% growth.

“However, there are some notable headwinds to consider, all of which will push up costs. Customers returning fewer clothes helped boost the gross margin but Boohoo is now guiding for return rates to drift back to historic levels. Delivery costs have become more expensive for overseas markets and marketing spend is going up. The retailer will spend more on improving operations and IT.

“If that wasn’t enough, there are the extra costs relating to actions from the recent review of its supply chain. Boohoo has pledged to improve its governance and be more focused on supply chain compliance, all of which will cost time and money.

“This begs the question as to whether Boohoo is going to pass on all these costs to the consumer or whether it stomachs them itself. The stock market hates it when companies have to incur more costs and so there is a risk that its share price rally comes grinding to a halt if profits margins are being squeezed. Just ask ASOS which has been in this situation before.

“Boohoo has been under attack for some time by short seller ShadowFall which has now come out with more questions about the company’s actions. For example, it wants to know the value of the claim being pursued by a class action lawsuit in the US relating to alleged ‘false and deceptive’ advertising practices, and whether investors were made aware of the legal claim ahead of the £198 million share placing in May.

“The more successful a business becomes, the greater the target it is for criticism. The idea that the recent supply chain review puts an end to the scrutiny of Boohoo is a misconception. Until it delivers on a promise of greater corporate governance and treating staff and suppliers fairly, the fanfare around Boohoo’s rapid sales growth will always have a sour taste to it.”

Royal Dutch Shell

“A few short years ago Royal Dutch Shell spent billions of dollars on acquiring its rival BG in order to get materially bigger.

“Now it looks like the plan is to get significantly smaller in response to the way Covid has ravaged the energy sector. Poor old middle management – that most maligned of roles – looks like it will bear the brunt of the losses based on CEO Ben van Beurden’s comments.

“The big job cuts are understandable and are likely to receive a broadly positive response from the market. A more efficient, more streamlined operation could result in more profit which it can share with investors and potentially invest in reshaping the business.

“However, while some roles might have been rendered irrelevant by the transition away from fossil fuels, Shell will lose good people.

“This could undermine its recovery coming out of the pandemic and also hamper its attempts to head towards a greener future.

“The big argument employed by the oil majors when questioned on why they should be involved in a move towards cleaner sources of energy is that they have lots of transferrable skills and experience which can be applied in areas like renewables.

“The planned redundancies may get rid of some dead wood but some of that store of skills and experience seems very likely to be lost too.

“This industry has track record of cutting jobs in previous cycles and then facing a skills shortage down the road.

“Shell probably had little choice but to act given the scale of the volatility in oil markets and the seismic changes happening in the industry. Time will tell if it acted in the right way.”

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