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Market Outlook

The week ahead: UK retail sales; GameStop, Cineworld results

Read our pick of the top stories to look out for this week (22-26 March), and view our key company earnings schedule.

In this week's video, David Madden talks about the volatility in stocks due to a jump in the 10-year yield. He discusses the US dollar, euro and sterling, as he previews the major UK and US economic announcements in the week ahead.

Kingfisher full-year results

Monday: In terms of timing, the pandemic has been kind to Kingfisher. As one of the few retailers allowed to remain open during lockdowns, the company saw a big improvement in its B&Q and Screwfix businesses as DIY spending took off. In December, management took the decision to return its £130m business rates relief as it became apparent it was being used as a political football by governments to interfere in the corporate governance of the business. 

When Kingfisher reported its Q4 numbers back in January, there was some evidence of a modest slowdown from the 17.4% rise in group sales in Q3, with like-for-like sales up until 9 January showing an increase of 16.9%. The main areas of growth have been in e-commerce, which grew 155% over November and December. November sales were a little disappointing on a group scale due to weakness in France and Spain, which is expected to continue. However, UK and Ireland look set to remain robust, with Screwfix on track to reach £2bn of sales in this fiscal year. Full-year profits are expected to come in at the top end of a range between £667m to £742m, with £15m to £20m of restructuring costs.

Adobe Systems Q1 results

Tuesday: Adobe is another tech stock that surged to record highs this year, due to the rise in home working. Home to the ubiquitous Adobe Reader app, as well as Photoshop and other digital marketing tools, Adobe has seen its revenues rise steeply in recent months. Helped by a diversified product range, Adobe easily beat 2019’s annual revenue numbers of $11.17bn, with a record Q4 sending 2020 revenue to a new-high $12.87bn. Revenue for the fourth quarter came in at $3.42bn, with its Digital Media business contributing $2.5bn of that. Its cloud business has also shown strong growth. In terms of its expectations for Q1 and the new fiscal year, management are targeting full-year revenues of $15.15bn with a 19% increase projected for Digital Media. For Q1, expectations are for revenue of $3.75bn and earnings per share of $2.19.

GameStop Q4 results

Tuesday: Do the fundamentals really matter for GameStop? The retailer’s share price has experienced huge amounts of volatility since the middle of January, and short interest has reduced markedly from just shy of 71.2m shares at the beginning of the year, to levels of under 15m now.

Away from the noise that has dominated the discourse around this company, the GameStop share price has been struggling for some time. Sales have fallen as online game stores have eaten away at its market share. Quite simply, 'mall' shopping isn’t anywhere near as profitable at a time when ordering games can be done at the click of a button and downloaded straight to your computer or console. Reddit day traders appear to have taken it upon themselves to come to the rescue of a tired brand, which is in desperate need of rejuvenating itself in the digital age. In 2019 Sony pulled all its digital content from GameStop stores, as online gaming started to overtake physical sales by as much as four to one. 

GameStop has already closed hundreds of stores in response to this changing dynamic, with the Covid-19 pandemic accelerating this process. While all the free publicity over the last few weeks is likely to have boosted their sales in the most recent quarter, the longer-term future still looks very uncertain.

UK unemployment (January)

Tuesday: The ILO measure of unemployment saw another modest uptick in December to 5.1%, moving above 5% for the first time since March 2016, before the Brexit referendum. This lagging measure still seriously underplays the actual rate of unemployment, which is trending at a significantly higher level, when compared to the more up-to-date monthly claims data. 

With the tighter restrictions that were imposed at the beginning of the year, a number of struggling businesses may have decided that it’s no longer worth keeping workers on furlough if they can’t reopen soon. As if to reinforce these concerns, the number of redundancies announced in the three months to December rose by 30,000 to 343,000. This is likely to increase again in January. On a more positive note, the number of payrolled employees rose by 83,000 in January, however the number of jobs lost since this time last year is still more than 700,000.

Things are starting to look a little brighter if the latest economic projections from the OBR are any guide. They upgraded their economic projections for unemployment down from a peak of 7.5% to 6.5% earlier this month, as the chancellor set out his various measures to extend furlough, as well as making reductions to key tax and business rates. It’s still worth keeping track of the monthly jobless claims numbers, which are a much more accurate reflection of the labour market, which fell to 7.2% in January, down from 7.4% in December.

France and Germany flash PMIs (March)

Wednesday: It’s been clear for several months now that economic activity between the services sector and manufacturing sector has been chalk and cheese across the board. The various lockdown restrictions that have been in place since October in both France and Germany has meant that the services part of both of Europe’s largest economies has really struggled.

In France, services has been in contraction for six successive months, while in Germany it’s been five months of underperformance. This period of contraction is set to continue in March with both countries well behind in their vaccination programmes, and some form of restrictions set to remain firmly in place for much longer than originally anticipated. 

Manufacturing has been a bright spot and has helped on the margins with some solidly positive numbers on both sides, with Germany outperforming, however with little prospect of restrictions being eased in the near term we can expect further pain for services in March as we come to the end of Q1. 

With restaurants and bars in France set to remain closed until Easter, and possibly beyond, it is hard to make a case for recovery any time soon, which means March is likely to be the seventh consecutive month of contraction. Despite the positive vaccine news lifting the mood from a market point of view, it is clear that there will be no similar uptick in economic activity until restrictions start to be eased significantly, perhaps sometime in the late spring, and both countries get their vaccination act together.

UK CPI (February)

Wednesday: In recent months UK inflation data has fallen below the radar a little, however given the sharp rise in US and UK 10-year yields in the past month, long-term inflation expectations have been rising since the end of last year. A combination of the large-scale fiscal expansion in the US and additional fiscal support in this month’s UK Budget, have sent US and UK yields up to their highest levels since before the pandemic, as concerns grow that all of this extra liquidity, along with an economic reopening, could see an inflationary spike. The UK 10-year gilt yield is now back to levels it was at the end of 2019, above 0.8%, as optimism over a strong economic rebound starts to gain traction.

For now, there doesn’t appear to be too many signs of a build-up in higher prices in terms of the inflation basket, however as those of us who fill up our cars have noticed, pump prices are quite a bit higher than at the end of last year. This isn’t expected to manifest itself in this week’s February data, though we did see an unexpected tick up in prices to 0.7% in January.

As we head towards the summer, the headline consumer price index (CPI) numbers could start to get more interesting, particularly since producer price index (PPI) data has been trending higher in recent months. Expectations are for UK inflation to edge up from 0.7%, with core prices set to remain at 1.4%.

Cineworld full-year results

Thursday: The pandemic has been especially hard on the cinema sector, which has been closed for most of the last 12 months. There was a modest reopening last summer, with reduced capacity, but the likes of Cineworld and AMC, who own the Odeon and IMAX brands, have seen their revenues hollowed out. They also haven’t been helped by major film studios' decision to delay the cinema releases of their latest blockbuster films. Disney’ s Mulan, which was subsequently released online, and the latest Bond film No Time to Die, have been delayed multiple times.

The reopening timetable has been particularly problematic for Cineworld given their finances were already starting to attract scrutiny even before the lockdowns. It soon became apparent that the costs of the £2.5bn Regal deal in 2018, along with the refurbishment costs of upgrading the real estate was proving to be problematic, and the pandemic only served to tip the business over the edge.

In November the company managed to get the extra liquidity it needed to secure a stay of execution, agreeing lending waivers until June 2022, and securing a new debt facility of $450m, which matures in May 2024. This still means that the company is leaking around £50m each month, with a best-case scenario of reopening cinemas no later than May 2021. This now looks highly ambitious given the restrictions currently in place. Any further delays, and Cineworld may have to go back to its lenders cap in hand for further support.

Revenues are expected to plunge from $4.37bn in 2019, to about $1bn. More importantly, in terms of the outlook, revenue for 2021 is estimated to rise to around $2.5bn. This still seems a bit of an ask given the challenges facing the industry, and is also highly dependent on the success of the US and UK vaccination programmes.

Darden Restaurants Q3 results

Thursday: Darden managed to ride out the pandemic shutdowns better than most. The owner of the Olive Garden was able to offset the effect of a lot of the shutdown period by offering a takeaway service. Sales still saw a 43% drop in the previous quarter and the likelihood is that with social distancing rules set to remain in place for some time to come, that lower revenues will be a natural consequence of that. Darden has embarked on a $35m restructuring programme to counter this.

In Q2 same store sales fell 20.6%, despite big increases in online ordering from its Olive Garden and Longhorn Steak House outlets. Q3, which covers the lead-up to Christmas and New Year tends to be Darden's best quarter, and the expectation was that sales would fall between 30% to 35%, with little improvement much before Q4. 

This could well surprise to the upside given the uplift of stimulus payments at the beginning of January, while CEO Gene Lee also gave a nod to Taylor Swift for name checking the Olive Garden in one of her recent songs. This week’s latest Q3 numbers could be just the tonic for the Darden share price, which is already trading at record highs. Profits are expected to come in well above the levels of Q2, with expectations of $0.69 a share.

Smiths Group half-year results

Friday: When coronavirus was starting to spread across Europe in March and April, Smiths Group was at the forefront. As a specialist in the production of medical ventilators, the company stepped up as the NHS scrambled to boost the number of breathing aids it needed to help save lives.

The company makes ventilators at its Luton site, and has ramped up production as well as providing intellectual property advice to other companies to help boost production. In March last year, Smiths Group said it was delaying the separation of its medical devices unit until the pandemic had passed. When the company reported its full-year numbers in September, this intention was left unchanged, however given how well the business performed in that period one does have to question the reasoning behind continuing down that path. 

In its last set of full-year numbers, the company reported that revenues rose 2% to £2.55bn, with Smiths Medical accounting for £918m of that, along with most of the profits as well. Headline total profits for the year came in at £338m. November’s Q1 update showed that revenues from continuing operations was down 2%, while Smiths Medical continued to outperform rising 4% on an underlying basis. This trend looks set to continue in Q2.

UK retail sales (February)

Friday: After a solid rebound in the wake of last April’s lockdowns, apart from a -4.1% decline in November, UK retail sales growth saw an even bigger decline in January, sliding back sharply by -8.2%. This shouldn’t be viewed as too much of a surprise given that tighter restrictions on movement were brought into effect on the 6 January, as people were ordered to stay at home. 

While some of the big fall in November can be attributed to a pull forward effect ahead of the Christmas break, the falls seen in January were purely as a direct consequence of consumers pulling back on spending, with the prospect of weeks and months of tighter restrictions and rising uncertainty. 

The picture now looks a little more positive, on the back of an impressive vaccine rollout which is helping to underpin consumer confidence, and a much shallower contraction in UK GDP in January than was originally feared. The biggest drag on retail sales will continue to come from the closing of bars and restaurants, which are set to see extremely subdued levels of activity, though as recent retail numbers have shown the boom in online and digital sales is helping compensate in other areas. 

The new lockdown imposed in January hit retail sales, but the outlook for February is more positive, as economists expect a rebound of 2.2%. The latest flash PMI’s for manufacturing and services for March will also be announced, which came in at 55.1 and 49.5 in February. 

US personal spending (February)

Friday: US personal spending has been a decent bellwether of retail spending and consumer confidence over the last few months. After a strong rebound in the five months after the big declines of March and April of last year, spending slowed down again at the end of last year. 

That slowdown was followed by a fairly decent rebound in January, as new stimulus payments found their way into US consumers’ pockets. The agreement between US lawmakers over a further $900bn fiscal support package at the end of December prompted a big jump in personal incomes of 10% and a rebound in consumption patterns, with a rise of 2.4% in personal spending. 

This rebound is likely to prove temporary, as the prospect of another $1.9trn package in March is likely to see a similar boost next month. Having seen a 10% rise in personal income for January, a 7.1% fall is probable in February, as the one-off payments get smoothed out. The drop in personal income is also likely to precipitate a modest pullback in personal spending, which is expected to come in at -0.6%. 

Index dividend schedule

Dividend payments from an index's constituent shares can affect your trading account. See this week's index dividend schedule

Selected UK & US company announcements

Monday 22 March Results
BioLife Solutions (US) Q4
Blackbird (UK) Full-year
Dunkin' Brands (US) Q4
Guild (US) Q4
Kingfisher (UK) Full-year
Tuesday 23 March Results
AAR (US) Q3
Adobe (US) Q4
Alliance Pharma (UK) Full-year
At Home (US) Q4
Elementis (UK) Full-year
GameStop (US) Q4
IHS Markit (UK) Q1
iMedia Brands (US) Q4
Pebble (UK) Full-year
Steelcase (US) Q4
YouGov (UK) Half-year
Wednesday 24 March Results
Bellway (UK) Half-year
FreightCar America (US) Q4
General Mills (US) Q3
Pendragon (UK) Full-year
Sigma Labs (US) Q4
Tela Bio (US) Q4
Telit Communications (UK) Full-year
Winnebago Industries (US) Q2
Thursday 25 March Results
Allied Minds (UK) Full-year
Cineworld (UK) Full-year
Darden Restaurants (US) Q3
Funding Circle (UK) Full-year
Harmony Biosciences (US) Full-year
Oxford Industries (US) Q4
Robinson (UK) Full-year
S4 Capital (UK) Full-year
Friday 26 March Results
Smiths Group (UK) Half-year

Company announcements are subject to change. All the events listed above were correct at the time of writing.


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