Weak US data and earnings hits sentiment, Boohoo sales slump, Dr Martens trips up again, Deliveroo upbeat

“An overnight sell-off in the US has soured sentiment across Europe this morning,” says AJ Bell Investment Director Russ Mould.

“For once bad news really was bad news, rather than a positive because of the implications it might have for interest rates. Weak US retail sales suggested consumers’ resilience may have been pushed beyond breaking point.

“This undermined the hypothesis of a ‘soft landing’ for the US economy with inflation easing before rates have inflicted too much pain.

“News that Microsoft is planning to cut 10,000 jobs and a series of weak earnings reports also didn’t help the market’s mood.

“On the UK market, Dunelm’s value-focused homewares proposition is still resonating with shoppers. A beefed-up online operation and a quality, inexpensive range of goods have helped drive a remarkable renaissance at Dunelm in recent years.

“Since current CEO Nick Wilkinson took the helm nearly five years ago the shares have advanced more than 60% compared with a 3.5% increase for the FTSE All-Share over the same timeframe – all this despite considerable intervening volatility in the wider retail sector.”

Boohoo

“Just because Boohoo’s latest update wasn’t much worse than expected, doesn’t mean it was any good either and it still seemed to spook investors.

“Sales are falling, margins are being heavily squeezed and the company has nudged revenue guidance lower.

“At least Boohoo is making progress on the basics of retail, carefully managing its costs, cash and inventory so it can keep paying the bills and avoid being left with lots of unwanted stock which it then has to shift at a major discount.

“Longer-term doubts about the whole online fast fashion model remain. One offshoot of the cost-of-living crisis could be a less disposable culture. Online returns can be a hassle and now Covid restrictions are no longer an obstacle, people might prefer to go into a shop and try clothes on before they purchase them.

“Boohoo may be hanging on to some of the market share gains it made during the pandemic but there has certainly been a fightback from physical retail in the clothing space.

“Add on social and environmental concerns about the way its clothes are made – with Boohoo having a far from unblemished record in its supply chain – and there are plenty of obstacles to winning back the market’s favour.”

Dr Martens

“For what’s meant to be an iconic brand with a product that constantly stays in fashion, Dr Martens’ performance in recent years is akin to a model tripping up on the catwalk again and again.

“Just as it tries to get back on its feet, along comes another problem. This time it’s a bottleneck at its LA distribution centre and weaker than expected direct-to-consumer sales.

“The former should hopefully be a one-off issue that is smoothed out over time. But the direct-to-consumer sales weakness is more worrying. Many footwear companies have invested heavily in beefing up their sales operation, setting up websites to sell direct from the factory to the customer’s home, thereby increasing their profit margins. This isn’t replacing the traditional route of using a third-party retailer, merely increasing the routes to market.

“Dr Martens is a little bit different in that it has had physical stores for a long time and is already well versed with dealing with consumers as well as retailers. But the latest demand weakness will stir the argument that a recession is biting, and people are thinking twice about paying a three-figure sum for a pair of boots when times are hard.

“So why is it that companies like Nike and JD Sports say trainer sales are holding up, and not chunky boots for Dr Martens? It suggests that consumers are happy to keep spending on stuff they really want, but the ‘nice to have’ items are being more of a considered purchase.

“US firm Woodson Capital Management will be happy with the latest profit warning as it recently disclosed a ‘short sell’ bet against the business. Dr Martens’ share price fall on the latest trading update effectively hands Woodson an instant profit.”

Deliveroo

“A day after Just Eat Takeaway said its earnings were improving after having a sharper focus on profit, along comes Deliveroo with a similarly upbeat message. It still has a long way to go before it makes any big money, but at least it is travelling in the right direction.

“The big concern, however, is the lack of growth in order volumes year-on-year, which suggests the cost-of-living crisis is having a negative impact on takeaway demand. As restaurants push up prices to cover their own input cost inflation, it makes it more expensive for the consumer when they order a takeaway.

“Deliveroo benefits from higher priced meals as it takes a cut of the order value, but many consumers will no longer be able to afford to get a curry or pizza sent to their house instead of cooking themselves. Year-on-year volume growth has disappeared in Deliveroo’s past quarter, and if they go into reverse over the coming months then the company might be less optimistic about its fortunes.”

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