FTSE defies market woes, Boohoo slumps as sales growth below expectations, and Diageo is riding high

“There is a decent showing across European equities including a 0.6% gain in the FTSE 100 to 7,148,” says Russ Mould, Investment Director at AJ Bell.

“That’s quite surprising given how a cocktail of issues have been clouding the market in recent sessions, namely rising bond yields making tech stocks less attractive, ongoing supply chain issues, the spike in energy prices and broader inflation, and the Evergrande drama still playing out.

“The UK market was propelled by miners, oil producers and financials – all beneficiaries of strong economic activity, which is again perhaps a surprising movement given growing fears over global economic growth as we head towards 2022.

“Oil producers are benefiting from higher oil prices but demand for miners and financials might represent investors rotating once more from high growth stocks towards lower rated names that offer growth at a cheaper price, even if that growth is less racy.

“IPOs were in the spotlight as two new entrants got off to a good start, and one recent name dug itself a deeper hole.

“Oxford Nanopore floated at 425p and had hit 570p within the first hour of trading. Among small caps, Made Tech listed at 122p and quickly moved higher to 148.5p.

“In contrast, Parsley Box hung his head in shame as its shares continued to fall lower. Having listed in March at 200p, the company issued a shocking update over the summer which pulled the price down. The stock has slumped even further to now trade at 77.5p after further setbacks, representing a 61% decline since IPO.”

Boohoo

“Boohoo is one of the big names that has helped to create the fast fashion movement. It has done so well in recent years that sales growth expectations have been very high.

“It’s been a real hit with younger people, drawn to its cheap dresses and constantly changing product range.

“When it disappoints on the sales growth front, the market takes a very dim view of the company. That’s the situation now after the company reported second quarter sales growth of 9%, significantly below the analyst consensus forecast of 28% growth.

“Profits have also been hit by higher costs, which is a force disrupting numerous industries.

“Boohoo has blamed the slower second quarter on more UK customers returning products, competition from physical stores reopening after lockdown restrictions were lifted, as well as consumer uncertainty and ongoing Covid-related disruption in overseas markets.

“During the various lockdowns a lot of people couldn’t be bothered to go to the Post Office to return items, so clothing retailers benefited from fewer returns. Historically fancy items were more likely to be returned, such as dresses after wearing them (with the tags still on) to a party. Restrictions on social gatherings meant those items were in lower demand during lockdowns, but demand is bouncing back and so too are the returns.

“The end of furlough is going to weigh on Boohoo given that people who were still on the jobs support measure as it ended may well have been in its target customer range given the typical young age of people in roles that have been affected, such as in the travel sector.

“It’s important not to get too hung up on one quarter’s results and it is encouraging to see Boohoo report better trading in the past few months.

“Strategically Boohoo is getting its act together on the ESG front, with more control over its supply chain and various initiatives to make amends following poor governance.

“The company also continues to expand organically and via acquisitions, finding new ways to reach a broader audience and to sell more items to customers, such as beauty products.

“A plan to launch a resale platform in 2022 is also interesting as it shows Boohoo is taking steps to ensure that customers don’t stray too much to competitors, which include second-hand sellers such as Depop and Ebay, as well as the likes of ASOS.”

Diageo

“Guinness manufacturer Diageo is demonstrating that good things truly do come to those who wait as, having ridden out the worst of the pandemic, the company reports a really strong start to its new financial year.

“The company is benefiting from people opting for premium brands and greater on-trade spending as people get back to restaurants and bars.

“Impressively this is expected to bolster margins, despite the company facing extra costs associated with supply chain constraints.

“Most of Diageo’s drinks portfolio is spirits and this is a part of the industry with attractive qualities, including strong growth as consumption increases in emerging markets, cheap costs of production but significant brand power and high selling prices.

“After all people are usually willing to fork out more for their favourites – be that Johnnie Walker whisky or Captain Morgan rum – in a way they wouldn’t necessarily seek out a specific brand of wine, for example.

“The off-trade business which was so crucial while Covid restrictions were in place has remained robust and the Diageo is still to enjoy the benefits of a recovery in the duty-free trade associated with travel hubs.

“The company is not complacent, signalling continuing volatility in its markets but its decision to continue investing in marketing and its commercial know-how demonstrates refreshingly long-term thinking.”

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