Fed decision sees sigh of relief from markets, ASOS and Boohoo stuck in the gutter and 'nice try' Halfords

“The initial market reaction to the largest rate hike by the US Federal Reserve in nearly 30 years was a sigh of relief,” says AJ Bell Investment Director Russ Mould.

“After last week’s US inflation shock the market had steeled itself for a big rise. Although the extent of the hike was so widely predicted ahead of time that you could be forgiven for suspecting possible leaking to help manage expectations.

“If so, job done as stocks bounced on the decision. It helped that the move was accompanied by some soothing words from Fed chair Jerome Powell, who characterised the size of the hike as unusual and not something he expected to make a habit of.

“He also did his best to allay fears of a recession. Although the predictive powers of Powell and his team have rather lost their credibility given how long they stuck with the line that inflation was transitory rather than something which was here to stay.

“And perhaps it was this lingering concern over a global downturn which helped put pressure on the FTSE 100 this morning.

“Investors will find out later today if the Fed’s action will put any pressure on the Bank of England to follow suit with a firmer move than 0.25% increase which is widely expected. The Bank has to contend with a more fragile economic backdrop than the Fed but today’s news from an industry body that UK food prices are set to surge 15% is another indication of just how acute inflationary pressures are.”

ASOS / Boohoo

“The pace at which online retailers have gone from sitting on cloud nine to being stuck in the gutter is quite remarkable.

“It only seems like yesterday when everyone was celebrating how fashion retailers were doing so well during the pandemic as people bored at home were eager to keep refreshing their wardrobe. Now the pressure on family finances has resulted in a shift in consumer behaviour with more considered purchases and more people changing their mind once they make an order.

“Elevated order returns look to put a big dent in ASOS’s earnings. Not only will the company incur higher costs from having to process returned products, but it will also have to mark down prices to shift these unwanted goods.

“ASOS has subsequently slashed its earnings expectation big time. Full year pre-tax profit is now expected to be in the range of £20 million to £60 million, which is significantly below the £92 million analyst consensus forecast before the latest trading update. This has a knock-on impact for cash generation, meaning that instead of the £93 million net cash position forecast by analysts, ASOS now expects to end its year with net debt of between £75 million and £125 million.

“What a day for José Antonio Ramos Calamonte to be appointed chief executive. There will be no fanfare and celebration, instead he gets to deliver terrible news on the first day in the job. Given that it’s an internal promotion, he won’t be surprised by the state of the business having worked for ASOS since January 2021.

“It's all change at the top for ASOS with a new chair as well, with Jørgen Lindemann being appointed. Investors will be hoping for some fresh thinking in the boardroom, particularly as the share price has fallen by 80% in the past 12 months and now sits at a 12-year low.

“Surprisingly, given the weak backdrop, Boohoo hasn’t lowered its earnings guidance with its latest update. Admittedly it already gave a sales warning last month where it warned of slowing revenue growth and higher operating costs.

“Boohoo is pinning its hopes on people buying new outfits for their summer holiday which might not be the big payday it expects.

“The squeeze on people’s finances means that many people won’t be able to afford to go away this summer and so they may be content with their current wardrobe if the most exotic thing they’ll do is sip piña coladas from their deckchair in the garden.

“Boohoo’s latest sales figures show how tough life is for fashion retailers. Revenue is down 8% over three months with overseas operations continuing to struggle with delivery delays.

“Unfortunately, life could get even worse for ASOS and Boohoo, as countless consumer-facing companies are experiencing reduced demand.”

Halfords

“Nice try Halfords. The company clearly wants to paint the 2021 financial year as exceptional and undoubtedly it was.

“However, this won’t wash with investors, who take the briefest of looks at the big growth in profit relative to the 12-month period to April 2020 flagged by Halfords, and instead focus on the significant year-on-year drop and warning of a further fall in the current financial year.

“The cycling boom during the pandemic and the great abandonment of public transport, which saw those of us who could do so retreating to the safety of our own cars, were both great news for a business specialising in push bikes and motoring products and services.

“A return to normality and tighter household budgets are clearly resulting in some of the Covid-induced surge in demand dry up.

“To its credit, there is no sense in which Halfords has taken its foot off the pedals. The company is looking to position itself for long-term growth associated with the switch to electric vehicles – including e-bikes and e-scooters.

“It is no surprise to hear Halfords boss Graham Stapleton loudly decrying the Government’s decision to scrap a £1,500 subsidy for purchases of new electric cars.

“The direction of travel is clear and by training up technicians and getting the right products in stock Halfords could position itself to be a leader in what is likely to be a fast-growing market.

“Although investors might have to accept a bumpy ride in the meantime as Halfords faces the same challenges as all retailers do at present.”

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