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The Week Ahead: UK inflation; Royal Mail, easyJet results

The rising cost of living in the UK is a key theme of the coming week’s announcements. The April reading of the consumer price index (CPI) is due out on Wednesday, with the latest data on wages and retail sales set to be released on Tuesday and Friday, respectively. On the company earnings front, look out for results from Royal Mail, easyJet, Aviva and more. 

OUR TOP THREE EVENTS FOR 16-20 MAY:

Wednesday – UK CPI (April)

The UK’s headline inflation number for April is expected to be ugly in the extreme. The 54% rise in the energy price cap, introduced on 1 April, is expected to make its way into the latest reading, along with higher prices for food, petrol, water and council tax rates, streaming subscriptions, gym memberships and more. 

Higher national insurance contributions, a weaker pound, below-inflation pay rises, and higher rent and mortgage costs linked to interest rate hikes are also contributing to the cost of living squeeze. 

CPI jumped 7% in the year to March, up from 6.2% in February, driven by higher prices for imports, which are largely due to the war in Ukraine and lockdowns in China. Core CPI, which strips out energy, food, alcohol and tobacco, rose 5.7% year-on-year in March, while the retail price index was up 9% from a year earlier. 

With the producer price index (PPI) indicating that input and output prices surged 19.2% and 11.9%, respectively, year-on-year in March, it is clear that further rises in headline inflation are coming. PPI has always tended to be a leading indicator when it comes to headline inflation, with businesses having to make the tough decision of whether to absorb the increased costs of producing the goods and services they sell, or pass those costs on. 

The April reading of CPI is expected to come in at 9.1%, which would represent a record high for this measure of inflation. Later in Q2, CPI is likely to hit – or perhaps even exceed – 10%. 

Thursday – Royal Mail full-year results

It’s not been a great start to 2022 for Royal Mail, whose shares are down more than 35% year-to-date at one-year lows. The declines came after the company cut its full-year operating profit forecast in January from £500m to £430m, due to a £70m restructuring charge that was announced in the Q3 numbers. 

Royal Mail handled 439m parcels during Q3, down 11% from the high base of the year-ago period when lockdowns boosted demand for home deliveries. Staff absences caused problems during Q3, disrupting some services. Royal Mail also said it would axe 700 managerial jobs as part of a reorganisation plan. 

Revenue in Q3 fell to £3.55bn, bringing year-to-date revenue to £9.6bn, a rise of 3.4% versus the first nine months of the previous financial year. The company spent an extra £340m on overtime and other staff costs. Despite the increase in staff costs, complaints about delayed deliveries soared amid the Omicron outbreak. The company is locked in discussions with staff over its latest pay round, with the threat of possible strike action. Full-year revenue is expected to rise to £13bn.    

Thursday – easyJet half-year results

The budget airline said it expects to see a half-year pre-tax loss of between £535m and £565m, amid an improving outlook for air travel. The company’s aircraft load factor increased from 68% in January to 81% in both February and March, as capacity was ramped up. In March the number of flights increased to 80% of 2019 levels, pushing total half-year group revenue up to £1.5bn, with costs of just over £2bn. In order to free up £120m of extra cash, easyJet sold and leased back another 10 A319s. 

Looking ahead, management said that they expect losses to come down, as capacity is forecast to rise in Q3 to 90% of 2019 levels, while in Q4 capacity on sale remains close to Q4 2019 levels. Fuel costs are hedged 64% for 2022 and 42% for 2023. 

Earlier this month easyJet said that in order to cope with cabin crew shortages and flight cancellations due to staff sickness it would remove seats from its A319 fleet. This would limit aircraft capacity to 150 passengers, allowing the airline to operate with fewer cabin crew, thus cutting the risk of cancellations as airlines compete to recruit more staff over the next 12 months.

MORE KEY EVENTS (16-20 MAY):

Monday 16 May

China retail sales (April)

China’s April trade numbers indicated that various restrictions and lockdowns had a chilling effect on trade flows, with imports showing no change on a year ago while annual export growth slowed to 3.9% from 14.7% in March. With the populations of Beijing, Shanghai and other cities being forced to stay in either their homes or workplaces, the ongoing situation is likely to cause further pain for the Chinese and global economies in the weeks and months ahead. 

In March, retail sales in China fell 3.5% year-on-year, the first decline since July 2020 and the biggest decline since April 2020 when China was coming out of its first nationwide lockdown. With Chinese authorities seemingly intent on doubling down on their zero-Covid policy, the outlook for the Chinese economy appears gloomy. A sudden change of policy seems unlikely in the short term. 

Estimates suggest that retail sales in April declined 6.2% compared to a year ago. Growth in industrial production is also expected to slow from 5% to 0.5%, and while Chinese authorities have eased monetary policy in a bid to stimulate the economy, that’s not going to be much help if people can’t go out. 

Tuesday 17 May

UK average earnings (March)

Earlier this month the Bank of England raised interest rates for the fourth meeting in succession, as well as warning of the effect that rising prices are likely to have on the UK economy in the coming months. With inflation surging to 7% in March and set to rise in further, it is more important than ever that wages at least try and keep up, even if that’s not what policymakers want to see. With energy bills soaring by 54% from April, and other living costs also increasing sharply, it’s hard to see what damage higher wages could do when they are already lagging behind headline inflation.

The fact remains that people are getting poorer in real terms, which will impact demand. Currently, earnings including bonuses are rising at 5.4%. Without bonuses, the figure drops to 4%. These figures are expected to have increased in the three months to March, but they are still trending well below inflation. The only silver lining is that unemployment is below pre-pandemic levels at 3.8%, though that’s cold comfort when vacancy levels exceed 1m.

US retail sales (April)

US retail sales numbers have remained robust so far this year, even as GDP contracted in Q1. In January consumer spending rebounded strongly, rising 4.9% year-on-year after an Omicron-related fall of 1.9% in December. This was followed by a 0.8% gain in February and a 0.7% gain in March.

April is expected to deliver another increase, this time of 0.9%, as the US’ buoyant labour market helps to boost spending. Nonetheless, there are doubts over how much of this growth is being driven by consumer credit, which surged again in March to $52.4bn, up from $37.7bn in February, with revolving credit rising by 21.4%. With US interest rates soaring, one has to question whether this sort of credit growth is sustainable. 

Vodafone full-year results

Vodafone shares have had a difficult two years. Total revenue was hit by a sharp drop in roaming revenues as cross border travel ground to a halt, while at the same time the company had to plough billions of euros into 5G to support future growth. While this isn’t a problem unique to Vodafone, the telecoms company has struggled to deliver on its longer-term goals. In Q3 its numbers came in better than expected as organic service revenues rose 2.7% to €9.65bn, beating expectations of a rise of 2.2%. The improvement appeared to be driven by a better performance in its Spanish business, which generated €940m in revenue. Total revenue for the quarter came in at €11.68bn. Management maintained their full-year guidance on adjusted EBITDA of between €15.2bn and €15.4bn. 

There was some talk earlier this year that Vodafone was discussing a deal with Iliad to merge their respective Italian operations. Iliad made an €11bn bid for Vodafone’s Italian operation, pushing the shares to their highest levels since May last year. The bid was rejected by Vodafone, sending its shares back down again, while at the same time it was being reported that activist investor Cevian Capital had built up a stake in the business in order to drive changes across the company. 

Vodafone CEO Nick Read appears to be of the mind to look at merger opportunities, both across Europe and in the UK. This seems optimistic given Vodafone already has high debt levels and its costs are only likely to increase as it invests in its 5G rollout and in Liberty Global’s assets in Germany. Read may regret not accepting the Iliad offer, given that revenues in Vodafone’s Italian business are on the decline.

Walmart Q1 results

While we’ve seen declines in Amazon’s share price, Walmart shares have been much more resilient – surprisingly so when you consider that most retailers are seeing increasing pressure on margins. As with other retailers over the last 12-18 months, business costs have eaten into the top line as extra staff were hired to help clean stores, stack shelves and get online orders out of the door. In total the company hired in excess of an extra 500,000 people last year alone.

There were concerns that these higher costs would impact its second half numbers, but higher sales in the leadup to the holiday period more than offset these concerns. Q4 saw another stellar performance, with revenues of $152.87bn and profits of $1.53 a share. Total annual revenue rose 2.4% to $572.8bn. The retailer said that higher supply chain costs of $400m in Q4 were challenging but were dealt with, as same store sales rose 5.6%, above expectations of 5%. Its outlook for 2023 is for sales growth of 4%, above expectations of 3.1%. Walmart also said it would be buying back another $10bn of shares in 2023. Profits are expected to come in at $1.48 a share.

Wednesday 18 May

UK CPI (April)

See top three events, above

EU CPI final reading (April)

Calls for an increase in interest rates by the end of the year have been getting louder, with several European Central Bank policymakers wanting to see rates lifted towards 0% from the current level of -0.5%. Many would like the ECB to at least acknowledge that it is serious about its inflation mandate. The recent flash CPI number put headline inflation at a record high of 7.4%, while core CPI rose to 3.5% from 2.9% in March.

With the EU talking of imposing an oil and gas embargo on Russia, it’s unlikely that these numbers will come down soon. If the ECB doesn’t raise rates in July, and gives no signal that it intends to increase them soon, one wonders if it ever will. Failure to act could add to the pressure on the euro, which is already down more than 7% against the US dollar year-to-date.

Aviva Q1 results

When Aviva reported its full-year numbers in March the insurer said it would return £4.75bn to shareholders, despite group annual operating profit falling to £2.26bn, down from £3.16bn in the previous year. The decline was mainly due to the sale of eight non-core businesses, as Aviva  focusses on its core markets of the UK, Ireland and Canada. Aviva also announced the acquisition of a small wealth management firm, Succession Wealth, for £385m in an attempt to cement its position as a market leader in the UK. The company said it is on target to make £750m in savings by 2024. For 2022, Aviva said it expects to see continued growth in its savings and retirement business through workplace pensions and other related sales. The company added that it plans to spend £870m on dividends, a 40% increase on 2021.

Burberry full-year results

Reporting the designer brand’s Q3 numbers in January, Burberry bosses were bullish having seen a 22% rise in sales growth in Asia, although sales in Europe were disappointing. Full-price sales rose 26%, helped by a strong performance in American markets, as well as across Asia. Retail revenue was up 5% to £723m, driven by a younger cohort of customers who were reached through activations on Instagram and Tik Tok.

Guidance on operating profits was adjusted higher, with expectations for an increase of 35% after a boost from currency effects. That would lift adjusted operating profit to between £500m and £515m. Since then, the picture in China has shifted somewhat, with a sharp decline in Chinese consumer spending as a result of China’ s zero-Covid policy. This could be a headwind this fiscal year, and may drag on its full-year operating profit target. New CEO Jonathan Akeroyd took the reins last month, as he moves into the role vacated by Marco Gobbetti.

Target Q1 results

The Target share price has been much more resilient since the company posted its Q4 and full-year numbers back in February. Like Walmart, the retailer warned of rising costs, saying they had the potential to impact its margins. Although revenue came in a little short at $31bn, profits beat expectations, coming in at $3.19 a share or $1.54bn. Annual revenue rose from $93.5bn in 2021 to $106bn. Comparable sales increased 8.9% on the quarter, with management expressing confidence that they can deliver higher profits despite rising cost pressures. Target said that labour costs would see an increase of $300m on wages and health care benefits over the next 12 months. For 2023 Target expects to see annual revenue growth of 5-8%, and plans to spend $4-5bn on capital expenditure. Profits for Q1 are expected to come in at $3.08 a share.

Thursday 19 May

Royal Mail full-year results

See top three events, above

easyJet half-year results

See top three events, above

Friday 20 May

UK retail sales (April)

After a strong January, UK retail sales have slumped as a result of rising prices and falling consumer confidence. The latter is languishing at levels last seen in 2008. Retail sales in the UK fell 1.4% month-on-month in March, the declines driven by a sharp fall in fuel sales as the rising cost of living prompted consumers to drive less and pare back on non-essential spending. 

In addition, there was a downward revision to the February number, from -0.3% to -0.5%. In cutting back on their spending, consumers are likely to have been looking ahead to the surge in energy bills and other living costs, which were due to come into effect from April. The most recent British Retail Consortium retail sales numbers showed that like-for-like sales fell 1.7% in April, so higher prices are certainly having an effect. On the plus side, the Easter period  may have brought a pickup on spending in travel and leisure venues, although given the various travel problems, the seasonal uptick may not be as big as in previous years. Expectations for April are for a decline of 0.3%. 

Williams-Sonoma Q1 results

Concerns over rising costs and falling margins have dragged shares in the kitchenware and home furnishings retailer down from last November’s record highs. The stock is now at its lowest levels since March last year. In Q3 the company said it expected to see a rise in full-year revenues of 22-23%. However, this fell short at 21.6%, as full-year revenues rose to $8.25bn, below expectations of $8.32bn, largely because Q4 revenue fell short of expectations at $2.5bn. There has been decent sales growth across all its brands, with West Elm and Pottery Barn standing out. In March, the company announced a $1.5bn share buyback program, as well as increasing the dividend, but this hasn’t stopped the decline in the share price. The company said it expects to deliver mid- to high-single-digit annual net revenue growth, increasing revenues to $10bn by fiscal year 2024. This seems somewhat optimistic given that market consensus is for $9bn in annual revenues by the end of fiscal year 2024. Profits for Q1 are expected to come in at $2.93 a share.

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Selected company results

MONDAY 16 MAY RESULTS
BuzzFeed (US) Q1
Diploma (UK) Half-year
Eastside Distilling (US) Q1
Weber (US) Q2
TUESDAY 17 MAY RESULTS
Britvic (UK) Half-year
Home Depot (US) Q1
Imperial Brands (UK) Half-year
Janus International Group (US) Q1
Land Securities Group (UK) Full-year
Lulu's Fashion Lounge Holdings (US) Q1
Shoe Zone (UK) Half-year
Sureserve Group (UK) Half-year
Vodafone (UK) Full-year
Walmart (US) Q1
WEDNESDAY 18 MAY RESULTS
Aviva (UK) Q1
Bath & Body Works (US) Q1
British Land Co (UK) Full-year
Burberry (UK) Full-year
Cisco Systems (US) Q3
Dynatrace (US) Q4
Marston's (UK) Half-year
Premier Foods (UK) Full-year
Shoe Carnival (US) Q1
Synopsys (US) Q2
Target (US) Q1
THURSDAY 19 MAY RESULTS
easyJet (UK) Half-year
Euromoney Institutional Investor (UK) Half-year
Great Portland Estates (UK) Full-year
National Grid (UK) Full-year
Palo Alto Networks (US) Q3
Royal Mail (UK) Full-year
FRIDAY 20 MAY RESULTS
Deere & Co (US) Q2
Foot Locker (US) Q1
Nationwide Building Society (UK) Full-year
Williams-Sonoma (US) Q1

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


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