European stocks lower after Wall Street slump, Card Factory riding high, Shoe Zone in hot demand, AO upgrades profit guidance and Games Workshop faces growing pains

“After a Devon Loch style collapse for US stocks late on Monday, the FTSE 100 and other European indices started Tuesday on the back foot,” says AJ Bell Investment Director Russ Mould.

“Sentiment soured on Wall Street as two members of the Federal Reserve indicated rates would need to move above 5% in 2023 to curb inflationary pressures and this helped erase earlier gains.

“So far this year there has been increasing hope of a softish landing for the US economy – that hope could be punctured if the Fed retains a hard line on rates. With that in mind all eyes will be on Fed chair Jerome Powell when he addresses a conference on central bank independence in Stockholm later.

“Inflation figures out on Thursday also represent a test for the relative optimism of the markets so far this year.”

Card Factory

“In an environment where every penny matters and the UK’s postal service has become completely unreliable due to back-to-back strikes, it’s a surprise to see a retailer of greetings cards do so well.

“One might have thought it was an easy decision to not send cards as that’s a quick way to save money. A phone call or text message is a cheaper alternative and hassle-free.

“However, Card Factory has been on a roll for quite some time, suggesting that its value proposition is resonating with cash-strapped consumers. When times are tough, sending a card and/or a small gift to someone can seem even more special than in ‘normal’ times.

“Whereas someone like WH Smith may charge £3 or £4 for a greetings card, Card Factory offers them for a fraction of that price. Perhaps it doesn’t matter that the card quality is inferior, it’s the gesture of giving that matters.

“Also playing to Card Factory’s strengths is the fact it is coping well with inflationary pressures including energy costs hedged until September 2024. It is one of the few retailers with genuine momentum.”

Shoe Zone

“Shoes are essential items so footwear retailers that can offer good value for money in a cost-of-living crisis stand to benefit the most. That’s exactly what we are seeing with Shoe Zone which is enjoying rising sales and profit. Life is going so well that the company has restarted dividends and will also make an extra one-off payment to shareholders.

“Shoe Zone has become one of the go-to places for individuals looking to being kitted out with new footwear for work and parents wanting affordable school shoes for their children.

“Interestingly, while demand is particularly strong, the company continues to close its weaker stores and right-size its estate. And when a lease is renewed, it is getting better deals. An average lease length of 1.8 years means it isn’t lumbered with stores if they aren’t generating the expected business, thus providing flexibility which many other retailers can only dream of.

“The outlook for Shoe Zone looks promising given widespread expectations of the country being in a recession during 2023. However, longer-term there is a chance that a stronger economy encourages people to be less cost-conscious when making retail decisions and more premium-priced retailers become in vogue for essential footwear.

“That’s always going to be a risk for Shoe Zone, but it will have seen this trend plenty of times before. If it can continue to streamline the business and get it running as efficiently as possible then it would be in good health at the point when competition increases once again.”

AO

“After multiple profit warnings in 2022, AO is on the comeback trail with news that profit for the year to March is going to be ahead of expectations.

“The company has been in repair mode since deciding to pull out of Germany and focus on its core UK operations. Costs have been taken out of the business and more effort made to improve margins.

“So far so good, but at the end of the day it still needs to shift high volumes of washing machines and fridges to make money. This remains a highly competitive market and in a difficult economic environment people with broken kit might be more willing to seek a repair rather than a replacement, such as was the previous trend to buy something new when the existing item developed a fault.”

Games Workshop

“First half results for Games Workshop reveal some growing pains for the business. The company has admitted the level of global sales achieved in recent times is a new development and inevitably that creates challenges.

“In many ways it is a positive that management are willing to be so open about the need to learn and improve the way its range of brands and new releases are brought to market. An upgrade to its IT systems is also taking longer and costing more than it previously expected. It is crucial that it gets the basics like this in place if it is to thrive as a global business.

“A significant drop in licensing revenue is interesting given the excitement around the company’s proposed deal with Amazon to create content based on the Warhammer brand.

“A final deal isn’t signed or sealed yet and even if or when it is made official it could be several years before any TV or film projects hit the screens and for Games Workshop to receive royalty payments.

“Games Workshop has an excellent proposition in a brand with a growing and extremely loyal cohort of followers, it just needs to bring its infrastructure up to speed to take full advantage.”

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