FTSE 100 steady as UBS calls back its old boss, Next slumps on cautious outlook and Alibaba soars on split plan

“The FTSE 100 made a solid start on Wednesday morning, continuing the cautious recovery for markets from the trauma of the collapse of SVB and forced union between Credit Suisse and UBS earlier this month,” says AJ Bell Investment Director Russ Mould.

“Bringing in Sergio Ermotti as CEO – a key figure in UBS’ recovery from the Great Financial Crisis – to oversee the combination between Switzerland’s two biggest banks is a move likely to help salve market wounds.

“Shares in International Distributions Services moved higher as its Royal Mail arm gave unions 48 hours to accept a pay deal or face the risk of the business being tipped into administration.

“Whether a negotiating ploy or not, it demonstrates just how fraught the situation is at the delivery company and how poor relations are with its staff. This implies a clear failure on the part of management.”

Next

“A popular trend in recent years has been for homes to display signs with pearls of wisdom or words of encouragement, often found for purchase in homeware departments of retailers such as Next. The argument is that the daily sight of a few choice words helps to focus the mind and lift the spirit.

“One might assume that Next chief executive Simon Wolfson has one of these signs on his office door saying ‘under-promise, over-deliver’. He is one of the few corporate leaders who never tries to make a situation look better than it is, and true to his word the latest guidance from Next is as cautious as you can get.

“Trading has been fairly resilient over the past 12 months but the company is preparing for a tough year ahead. There is no upgrade to earnings guidance and there is even comment on the question people are starting to ask – is Next now ex-growth? It’s no wonder the share price has taken a tumble.

“Next is in an odd situation. While lauded as a best-in-class retailer, there is no denying that growth has slowed over the past eight years. That period also coincides with a concerted push to broaden its income streams, developing its website as a hub for third parties to sell their brands while making its stores more relevant via click and collect services. Next’s decision not to abandon its high street presence was a wise one, particularly as physical stores are coming back into fashion.

“One could argue that Next has been laying the foundations for future growth, and that the adjusting period also included a big distraction in the form of the pandemic so it can be excused for not shooting the lights out with sales and profit progression. The key question now is whether its new strategy will yield the kind of returns enjoyed in the past.

“Its purchase of third-party brands out of administration such as Cath Kidston provide opportunities to boost its intellectual property at a discounted price. It is clearly going to accelerate this strategy given the appointment of Jeremy Stakol as a board director to oversee investments, acquisitions and third-party brands.

“High street kingpin Mike Ashley won’t be pleased as he’s made a successful career out of picking at the bones of failed retailers – now he faces serious competition from Next for the assets. However, simply picking up retail brands and stock on the cheap doesn’t always equate to positive returns.

“The latest figures from the ONS show that clothing and footwear demand remains strong, which bodes well for Next. However, an increase in food price inflation means a bigger chunk of someone’s take-home pay is going on groceries, which means there is less money to spend on other items like a new shirt or dress. Hence the outlook is not as rosy.

“Companies have been prioritising cost reductions in the past year, and there are signs that some of 2022’s inflationary pressures are easing such as supply chain issues and shipping costs, which means Next won’t have to put up prices a lot to protect margins. They are certainly positives for Next, yet it’s hard to say with any certainty what the rest of the year’s trading conditions will be like.”

Alibaba

“Shares in e-commerce play Alibaba – in many ways China’s answer to Amazon – soared overnight in New York on news of a break-up of the company.

“Often corporate reshuffles act as a catalyst for the share price on the basis that the individual parts of the business are worth more than the whole company. Breaking up the business could unlock this hidden value.

“As overhauls go this is about as dramatic as you could get and follows damaging crackdowns on the company and the wider sector by the Chinese authorities. It looks like Alibaba is seeking to assuage Beijing’s concerns about monopolistic behaviour.

“It is also worth noting that Alibaba’s e-commerce arm is the most profitable part of the business. Its top Chinese online marketplaces, Taobao and Tmall, do not take on any inventories. Instead, they act as paid listing platforms that link buyers to sellers, with its logistics unit Cainiao fulfilling orders. This keeps the amount of money it has tied up in the business low and supports strong margins.

“Allowing the core commerce operations to stand alone rather than subsidising other growth ventures, in areas like cloud computing, digital media, entertainment and technological innovation, could enable it to achieve a higher price tag on the market.”

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