Weak consumer backdrop punishes pound, Just Eat gets cash injection from Brazil sale, and Joules goes from bad to worse with another profit warning

“The FTSE 100 was broadly flat on Friday after a mixed set of retail sales, and with inflation driving the cost of servicing government debt higher,” says AJ Bell Financial Analyst Danni Hewson.

“The consumer backdrop feels increasingly gloomy and that’s bad news because consumer spending is such an important contributor to the UK economy.

“The Bank of England faces the unenviable task of trying to get inflation down without inflicting too much pain on businesses and households and the seeming impossibility of this task is raising the spectre of prolonged stagflation - a slowing economy and surging prices.

“That’s reflected in weakness in the pound, which is actually good news for a globally-orientated FTSE 100 as it flatters the relative value of overseas earnings.”

Just Eat Takeaway

“In what seems like a never-ending battle between online takeaway firms, Just Eat Takeaway has secured itself some more firepower through the sale of a stake in Brazil’s iFood.

“A €1.8 billion cash injection could be very helpful in terms of paying down debt and potentially marks a shift in Just Eat’s approach.

“Though the value of the transaction is notably less than the €2.3 billion turned down by the company last summer when ordering food over the internet arguably reached its zenith thanks to the pandemic.

“Just Eat might have to swallow the sale of its US platform Grubhub at a similarly discounted price, not long after splashing out on a $7.3 billion deal, as it looks to concentrate on boosting its market position in Europe.

“This retrenchment to a European focus makes sense when you consider how fierce the competition is on this side of the Atlantic.

“However, there are long-term and short-term questions about the viability of the business. Increased costs mean the company will probably have to put up prices for delivery. But will people be prepared to pay more, particularly when cost of living pressures are becoming more acute?

“All the while the company is facing rising costs and will have to maintain promotional spend to protect and grow its market share.”

Joules

“Just when you thought it couldn’t get any worse for retailer Joules, along comes another devastating profit warning.

“Customers have typically preferred to buy its goods if prices are slashed, so its margins have taken a big hit.

“Herein lies the problem for so many retailers. They are worried that consumers are under financial pressure so they’re panicking and discounting their goods thinking it’s better to sell something at a lower price than not at all.

“This is reflected in the latest ONS retail sales figures which flagged feedback from online retailers that suggests a range of promotions in July helped to drive sales.

“One of the biggest risks for retailers is getting sucked into the eternal discount war. Customers will become accustomed to enjoying money-off promotions and will expect to see them forever. It’s a dangerous game to play and takes a lot of effort to wean customers off these discounts.

“Joules is best known for its posh wellies and very few people will have wanted to make such a purchase when the sun is shining. The very hot summer also means its raincoats and knitted jumpers are collecting dust on the shelves. Furthermore, its home and garden products have suffered because households spent so much money on such items during the height of the pandemic that people simply don’t need to upgrade what they already have in the back garden.

“This hit to earnings has come at a terrible time for Joules given it is already experiencing debt pressures. News that it expects to require a waiver of certain covenants on its debt facilities is a major worry, and means Joules needs to speed up talks with Next over a possible equity investment.

“Next is thinking about spending £15 million on a stake in Joules, extending a strategy that has already seen it take equity positions in other retailers including Reiss and Gap UK and getting them to use its Total Platform e-commerce system.

“Joules said on 7 August that the investment would be done at a minimum of the market price. Given its share price has today fallen by 35%, it would mean Next gets a much bigger slice of the company if it were to spend the full £15 million.”

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