FTSE dips as inflations tops expectations, Netflix doing better than expected, ASOS unveils restructuring as it slips to a loss

“The FTSE 100 dipped on Wednesday as UK inflation came in a smidge higher than expected to match the multi-decade highs seen in July,” says AJ Bell Investment Director Russ Mould.

“Food prices were the major contributor to the inflationary surge, which will only ramp up the pressure on the Bank of England to maintain a hard line on interest rates ahead of its next meeting in November.

“Third quarter earnings season from the US may help to set the mood and so far, companies seem to be performing well, albeit against some pretty modest expectations.

“For now, corporate America seems to be standing up well to the inflation storm, but a lot will depend on the big tech companies reporting next week – with the destiny of the markets in the hands of the likes of Apple, Alphabet and Amazon.”

Netflix

“The stock market had already been anticipating a turnaround for Netflix judging by the pick-up in its share price in recent months, but few expected significant good news to appear before the launch of the cut-price advertising-led subscription tier in November.

“Netflix’s third-party quarter results pleasantly surprised, with revenue, operating income and subscriber numbers ahead of expectations.

“Netflix has been down in the dumps for a while, after seeing subscriber numbers surge during the pandemic and then finding it impossible to sustain this momentum as the world returned to some sense of normality. It now seems to have regained its mojo and there is a lot riding on the success of the new advertising-led subscription tier.

“First, it could help reduce customer churn – anyone looking to cut spending during the cost-of-living crisis can just move down a subscription tier, pay a bit less each month and still be able to watch Netflix. That’s better for the company than simply losing the customer outright.

“Second, it might attract new customers who were previously put off the higher price point of a subscription. Third, it creates an additional revenue stream for the group in the form of advertising income.

“Some existing customers might switch to the cheaper tier, but many won’t if they don’t want their TV show or film regularly interrupted with advertisements. Unlike Sky’s NowTV which only shows advertisements before a film starts, Netflix is going to average four to five minutes of adverts per hour watched.

“There are a lot of moving parts with Netflix’s revitalisation plan, but ultimately it all comes down to the content. If it cannot constantly refresh its library of content and ensure that quality of programmes is high, then subscribers will lose interest and go elsewhere. That’s a very expensive game for Netflix to play given the fierce competition for film and TV rights, and the spiralling cost of new productions.

“The fact Netflix chose to have a dig at streaming rivals by estimating they are all losing money (and pointing out it is not) is a bit of a cheek. Yes, it’s had a good quarter, but Netflix itself can be accused of paying excessive amounts of money for what turned out to be poor quality productions on plenty of occasions.”

ASOS

“There’s bad news and really bad news and given revelations about ASOS’ credit insurance and amended lending terms had hinted at something more existential, today’s update while sobering wasn’t apocalyptic.

“Yes, the company has posted a loss, but sales have held up reasonably well all things considered. The problem for ASOS is the current crisis has revealed flaws in its business model, including some thin operating margins.

“The online retail sector didn’t have to worry as much about the costly exercise of returns during the pandemic as people were reluctant to head to a busy post office to send a parcel back. At the same time, many weren’t watching the pennies as they are now and were perhaps happy to stick with a jumper that didn’t fit quite right.

“That’s no longer the case and the outlook for sales is weak as its youthful target audience, or their parents, face significant pressures on their disposable income.

“Crucially, recently appointed CEO José Antonio Ramos Calamonte has demonstrated he is taking the challenges in front of the company seriously.

“Some of the things he is looking at, like stock management, are basics of the retail industry and really things ASOS should have already had under control. When times were good it could perhaps afford to neglect these issues. Not anymore. Costs are being cut and ASOS may have to follow the lead of other retailers and start charging for returns.

“ASOS’s current predicament is only adding to longer-term concerns about the whole fast fashion model and whether, in an age when the focus is on sustainability and where sourcing cheap materials and labour is a much bigger challenge, it has as solid a future as previously thought.”

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