Debt ceiling fears mount, JD targets £1 billion profit and Watches of Switzerland warns on growth slowdown

“The FTSE 100 started Wednesday on the back foot as whispers in Washington about an impasse in debt ceiling talks soured the market mood,” says AJ Bell Investment Director Russ Mould.

“The first ever default on US debt is unthinkable and the likeliest outcome is an eleventh-hour deal but, as the beginning of June deadline for raising the debt ceiling signalled by US Secretary of the Treasury Janet Yellen draws closer, nervousness is likely to build.

“The extremely partisan nature of US politics is an obstacle to a deal as both parties seek to use the threat of the cliff-edge to secure concessions from the other side.

“Sage was in demand despite the gloomy market backdrop as it upgraded its revenue forecast off the back of a strong first half performance – demonstrating the company is doing a good job of navigating a decidedly mixed economic environment.

“London Stock Exchange Group was down as Blackstone, a Canadian pension plan, Thomson Reuters and other investors sold 33 million shares. However, having taken this short-term pain the overhang on the stock is now almost completely removed.”

JD Sports

“After a storming start to the year, JD Sports’ share price has slowed to a jog and despite reporting a record annual profit of near £1 billion, there was little to get the stock moving upwards in today’s results.

“True, the company does expect to exceed the £1 billion mark in terms of profit in the current financial year but, beyond this arbitrary milestone, JD still has work to do and considerable sums to spend to meet its ambitious goals for growth.

“Profit fell at the pre-tax level on adjustments, some of which related to restructuring and acquisition costs, and in February new CEO Régis Schultz flagged an outlay of up to £3 billion as JD looks to roll out as many as 1,750 stores globally over five years.

“For now, Schultz is off to a flier in his new role, replacing the long-term brains behind the business, Peter Cowgill. JD is demonstrating the strength of its brand and its successful capture of the under-25 demographic as it enjoys resilient sales.

“However, it needs to be wary of any shifts in consumer preferences. Fashion is by its nature cyclical and a move away from the athleisure trend would be unhelpful to JD.

“The company must hope that its target market, potentially insulated from cost-of-living pressures if they still live at home, continues to enjoy a decent level of disposable income and that its relationships with core brands like Adidas and Nike remain strong as they pursue direct-to-consumer strategies.”

Watches of Switzerland

“Over the past 18 months, the market has taken the view that Watches of Switzerland is one of those companies which could not sustain the high levels of growth seen during the pandemic where many people splashed the cash because they were bored and stuck at home.

“The company continued to argue that the high level of success was not a one-off, and that it reflected a structural shift in the market whereby more people were collecting watches as well as the benefits of expanding geographically.

“Its latest update finally shows that cracks are appearing, hence why the share price has taken a dive.

“In its defence, demand continues to exceed supply. What’s spooked investors is guidance for much slower growth in the new financial year as it flags that more challenging conditions may continue for the near-term.

“There will always be ups and downs with businesses and there is nothing in the latest update to suggest major problems within Watches of Switzerland. It’s simply a reset of growth expectations which has understandably caused the share price to correct.

“The trouble is that investors have seen other pandemic retail winners fall flat on their face over the past few years and they might worry that Watches of Switzerland’s latest update could be the first in a series of setbacks. The pressure is on for the business to deliver and not be put on the scrapheap along with the online fashion retailers who suffered an almighty post-pandemic hangover.”

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