Markets rally, Boohoo slumps on profit warning, and Domino’s cuts deal with franchisees

“Is the Santa Rally finally here? Markets certainly seem to have a spring in their step, with the major indices across Europe, Asia and the US all pushing forward,” says Russ Mould, Investment Director at AJ Bell.

“The US Federal Reserve’s monetary policy update last night has gone down well with the markets.

“The prospect of three US interest rate hikes in 2022 would suggest the central bank has a clear plan to not let inflation get out of control. Equally, it isn’t being too aggressive to trip up the economy. This sense of balance is exactly what investors want, and an upbeat tone from the Fed certainly seems to have rubbed off on markets.

“The S&P 500 closed 1.6% higher last night, and Japan’s Nikkei followed suit with a 2% advance on Thursday. In mainland Europe, markets enjoyed gains of between 1.2% and 1.7%, while in the UK the FTSE 100 advanced 1.1%.

“The UK market reaction might surprise some people given Prime Minister Boris Johnson’s televised briefing last night which gave a bleak view of events as Omicron spreads fast across the country, threatening to put pressure on the health system again.

“The seriousness of the briefing gave flashbacks to the early stages of the pandemic when we all sat around watching daily updates from the Prime Minister on how the world was at danger. One might have thought that was enough to put investors in risk-off mode, but that hasn’t happened.

“In addition to a strong day for equities, sterling bounced back after recent weakness, rising 0.3% to $1.3297. Brent Crude oil prices nudged 1.1% higher to $74.66, and even some of the seemingly vulnerable sectors like airlines and pub companies moved higher despite the risks to their business from Omicron. International Consolidated Airlines moved up 1%, while Marston’s traded 1.8% higher.”

Boohoo

“It’s never good when the name of your company is the same sound as the management are making after issuing a profit warning.

“Boohoo has already had a troubled year; add in the damage from the latest setback and you’re looking at a 66% share price slump so far in 2021.

“Last year the business was dragged over the coals for poor ESG practices, and it spent a long time trying to rectify what had become a PR disaster.

“This year supply chain issues and cost inflation are to blame for the online fashion retailer’s struggles, with a spike in product return rates also dragging the business down.

“Reduced guidance for margins has had a big impact on earnings, leading to full year EBITDA guidance being up to 37% below the market consensus forecast.

“Concerns that the Omicron variant is spreading fast do not bode well for the hospitality and leisure sector, and consumers are become more nervous about going out.

“That could be bad for Boohoo’s near-term sales as there would be less of a reason to buy a new dress or shirt if that special night out has turned into yet another session on the sofa with Netflix.

“Boohoo is taking the view that cost pressures are only temporary, but the pandemic is still raging, and the latest inflation figures would suggest things are getting worse not better.

“The only way Boohoo is going to win back the market’s favour near term is if revenue growth rates accelerate dramatically and it’s really hard to see that happening in the current environment.”

Domino's Pizza

“One of the strengths of Domino’s is its franchise model. This has enabled it to grow rapidly without using lots of capital or taking on big costs. The pandemic has also boosted demand for takeaways, creating a significant market opportunity for the company.

“However, for several years Domino’s has been locked in a battle with its franchisees who effectively refused to open new stores because they felt they were getting a raw deal from the parent company.

“There appear to be two main complaints. First was that Domino’s was taking too big a slice of the profit and second that it had pushed for the opening of too many new stores and cannabilised the business of existing franchisees.

“Domino’s has now struck a deal with these franchise partners which will see a not inconsiderable investment on its part, boosting marketing spend and improving the digital platform, and in return they will up the pace of openings and agree to participate in national promotions.

“The market likes the news as, at a stroke, it improves the growth trajectory of the business. However Domino’s relationship with its franchisees remains a vulnerability for the group which could rear its ugly head at the end of this three-year agreement.”

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