The week ahead – China, UK, US retail sales, Vodafone, EasyJet, Royal Mail, Halfords and Walmart

1) China retail sales (Oct) – 16/11 – retail sales growth in China finally appears to be gaining some traction, after several months of caution and concerns about a second wave. In the last two months improvements in imports growth, and an improvement in recent services PMI data suggests that the loss of confidence as a result of the February lockdown is slowly returning.  While we’ve seen anecdotal evidence of improved demand in the auto sector as well as rising demand from the likes of Apple in their Chinese markets, other evidence has been slow to manifest itself. In September, we saw the first solid month this year of positive retail sales growth, with a rise of 3.3%, after a 0.5% gain in August. This looks set to improve further in October with a rise of 5% expected, though with the Golden Week holiday at the beginning of the month this could well see a bigger jump. Year to date Chinese retail sales are still down 7.2%, so there is still significant room to play catch up. On the other side of the coin manufacturing has rebounded much more strongly, returning to the levels last seen at the end of last year in September at 6.9%, and is expected to remain resilient with expectations of 6.7%. 

2) US retail sales (Oct) – 17/11 – retail sales in the past few months have seen very much a V-shaped rebound from the big declines seen in the first part of this year. Since then we’ve seen 5 months of fairly solid gains with expectations fairly high that we could well see a sixth month of growth. Despite the strength of the rebound in consumer sentiment there are still significant concerns about the US economy, given that there are still over 9m more American citizens out of work than was the case at the beginning of the year. Despite these concerns the fact that the unemployment rate has come down so quickly to 6.9% ought to bode well as we head into the end of the year. This surprising resilience in the labour market is expected to be reflected in another positive month of retail sales, with a gain of 0.6% expected, albeit a bit lower than the 1.9% seen in September.    

3) UK Public Finances/Retail sales (Oct) 20/11 – Public sector borrowing for September saw another big rise of £35.4bn, bringing total borrowing for the year so far to just over £200bn. A lot is being made of the amount of money being spent, with concerns being raised in some quarters of how all of this will eventually be paid for. These are valid concerns and may well be behind some of the government’s recent missteps around funding certain areas of the economy, including quibbling over the costs of children’s school meals and regional lockdowns. The recent decision to extend the furlough scheme until March next year, in the wake of the lockdown of England for the whole of November is only likely to add to these costs. For now, markets aren’t overly concerned about this given the UK isn’t actually alone with respect to facing these problems, with October borrowing expected to see another big increase, of about £38bn. As far as UK retail sales are concerned, we have seen a more positive story with the consumer helping to drive a decent rebound in Q3. Since the lockdown in April we’ve seen 5 consecutive months of decent gains, however this could well be as good as it gets for retail spending as we head into year-end given recent steps by the government in re-imposing lockdown restrictions throughout certain parts of the country. In September retail sales saw an increase of 1.5%, however recent third-party studies have been somewhat mixed, with some suggesting a sharp slowdown in the October numbers, while others like the latest British Retail Consortium sales survey, showed a pre-lockdown surge which pushed the numbers higher ahead of the November lockdown. On the flip side, pub and restaurant sales saw a decline of 33% as tighter lockdown restrictions hit demand. Whatever the number for October, and expectations are for a -0.2% decline, it is likely to be a last hurrah, before we see an even sharper slide in the November numbers, a month from now. One thing seems certain Q4 is likely to see a sharp slowdown from the resilience that we saw in Q3.  

4) Vodafone H1 21 - 16/11 – when Vodafone reported in July the numbers showed that the business performed better than expected in Q1, albeit revenues still declined by 1.3% to just below €9bn. This decline was driven primarily by a fall in roaming and visitor revenues, not altogether surprising given the Covid-19 lockdowns. Fixed service revenues showed decent gains; however, it wasn’t enough to offset the drag from mobile revenue, with Italy and Spain showing the biggest falls. Management also raised their guidance for the year in the hope that its Germany and UK markets will act as a tailwind. Since then the share price has continued to drift lower, largely over concern perhaps over the performance in its Spanish and Italian markets given the sharp rise in infection and hospitalisation rates in those countries. The business is also facing a squeeze from the likes of BT and Telefonica across its markets in Europe, as it struggles to improve its cash flow. In this regard investors will be hoping that the recent decision to add Amazon Prime and YouTube Premium, to their mobile entertainment plan, on top of Sky Sports TV, and NOW TV entertainment pass, will help close the gap in this regard, and help pull the share price back up from the lows we saw back in October. 

5) EasyJet FY 20 – 17/11 – airlines have had a dreadful time of it in the last few months, with most struggling to maintain their cash flow when they are running their fleets in some cases at less than 30% of last year’s capacity. While some European airlines have gone cap in hand to their respective governments it has been notable that UK airlines haven’t gone down this route, though they have taken advantage of furlough money to tide themselves over in terms of their staffing costs. When Covid-19 first hit there was some optimism that the once the lockdowns had lifted that air travel would still recover about 50% of its capacity by the winter months. This optimism, while understandable, was always likely to be a little misplaced given that cold weather tends to coincide with a significant increase in colds and flu, and other contagious diseases. These concerns were quickly realised in September when EasyJet cuts its capacity outlook for the rest of the year, while in October the company revealed it carried more than 9m customers in Q4, well below the 28m carried in Q4 2019. This helped to generate £620m in revenues, a 73% decline on a like for like basis. Airline management were also forced to cut the capacity outlook again, saying they expected to fly 25% of planned capacity in Q1. Passenger numbers for the full year are expected to see a decrease of 50% to 48m, with the cash burn in Q4 reduced to less than £700m, below the £774m in Q3. In terms of boosting its finances EasyJet has already raised another £435m in the last month by way of the sale and leaseback of 20 of its aircraft as it looks to navigate its way through what is likely to be a challenging winter period, when a lot more staff members are likely to find themselves surplus to requirements. EasyJet has already said it is consulting on reducing head count by up to 30% and will take a £120m restructuring charge in this regard in H2.  The group headline loss before tax is expected to come in between £815m and £845m.    

6) Royal Mail H1 21 – 19/11 – having hit record lows earlier this year of 120p Royal Mail shares have embarked on a slow steady recovery, however they still remain some way short of their IPO price of 330p, which at the time politicians were criticising the government for selling off too cheaply. While the shares did indeed trade a great deal higher initially the reality was that the shares were always way too expensive when compared to other organisations in its sector space. It took a while for investors to wake up this fact, but wake up they did, with the management of the business also playing a part in the share price decline. Royal Mail’s biggest problem has been its higher cost base relative to its peers as well as its loss-making letters division. Parcels on the other hand has the potential to make up for that now that so much shopping is now done on-line. Now that Rico Back has departed as CEO, the hope is that new management will re-engage with the work force and help push through further efficiencies to make Royal Mail work practices more in line with the 21st Century. The outlook for the business is much more positive now with the company recently competing with Amazon for a £550m one-year contract to deliver 215k Covid-19 testing kits a day in the UK. 

7) Halfords H1 21 – 18/11 – Halfords has turned out to have done fairly well, despite the economic disruption of coronavirus, with the cycling part of the business a notable outperformer. In October the shares hit their best levels since early 2019 after the company raised its guidance due to strong performance in both its cycling and automotive divisions. As a result, expectations for full year profits have already seen an increase from the best-case scenario, outlined by Halfords management back in July when they offered a somewhat low-ball downbeat assessment for the year. In October management said they expected H1 profits to come in above £55m, and in all probability eclipse last year’s full year profits number of £55.9m. While the increasing popularity in cycling is set to see a big jump in sales, the automotive division is also likely to see some decent growth as a result of an increase in car journeys, prompting increased sales in batteries, bulbs, and wiper blades, while staycations saw higher sales of roof boxes and roof racks as people holidayed at home. There is likely to be some caution about the outlook for H2, particularly given that cycling popularity tends to wane in the winter months.

8) Target Q3 21 – 18/11 – when Target posted its Q2 numbers back in August, it blew away expectations on all counts as its investment in online technology paid off in spades. Total sales climbed by 24.3% with profits rising to $1.7bn, or $3.35c a share, while revenues surged to $23bn, as the company cashed in on the fact that it was allowed to stay open throughout the lockdowns. Its kerb side pickup service saw a rise of 700% year on year, while online sales rose 350% over the same period, with the company adding 10m new digital customers. Electronics was a particularly strong area with strong sales of video games and home office items as more people worked from home. Clothing sales also picked up after a poor Q1. In terms of expectations for Q3 Target will be hard pushed to beat its blow out performance in Q2, nonetheless in terms of its competition with Walmart it is still leading the way in the US retail sector with its shares hitting new all-time highs last month. Profit expectations are for a more modest $1.56c a share.         

9) Walmart Q3 21 – 17/11 – Walmart shares have been another big winner of the coronavirus pandemic. Having increased e-commerce sales by 74% in Q1, they went better than that in Q2 with an increase of 97%, as more customers stayed at home and ordered on line. With the increasing popularity of on-line services Walmart CEO said that the company will look to build on these gains with some form of premium or membership service, in the same way Amazon offers its Prime service. We could get some more detail on this as we look ahead to Q4. One of the main reasons for the big surge in Q2 was US consumers cashing in their stimulus payments from the US government, a factor that will not be present in this week’s Q3 numbers. Business costs have also seen a big increase, in Q1 these rose by almost $1bn as the company employed an extra 200k people to help clean stores, stack shelves and get online orders out of the door. The company will also be realising a $1bn loss on the sale of its Argentina business. On the plus side it has managed to sell its Asda operation in the UK for £6.7bn, drawing a line under an area of the Walmart business that has struggled to keep pace with the ever-competitive nature of UK retail.  

10) NVIDIA Q3 20 – 18/11 – another US tech stock that has outperformed the wider market over the past few months, the shares are up over 140% year to date, and near to record highs, helped by a combination of outperformance in its data processor business, which has seen revenues surge, but also due to the higher demand for home computers as a result of the rise in home working. Revenues in Q2 saw a 50% increase to $3.87bn, with management saying they expected this to increase to $4.4bn in Q3, plus or minus 2%, while profits are expected to come in at $2.56c a share. The recent rise in crypto currencies could also help boost demand for its chipsets as well, with bitcoin back near three-year highs. NVidia’s A100 GPU is used by the likes of Amazon, Google, and Microsoft in their respective cloud businesses, where demand has been strong, and is likely to remain that way as all companies look to boost their cloud capacity. While most people know NVidia for its high-performance graphics chips, demand here has also been fairly robust, however there is a concern is that while video games have become more popular, gaming console demand could slow, given they are expensive bits of kit, and about to get more so with the launch of the new Xbox X and the PlayStation 5. This could make the share price vulnerable to a pull back if this week’s update falls short in any areas. The recent deal that saw the company buy ARM Holdings for $40bn is also expected to help boost revenues in the longer term as the company looks to boost its investment in AI.  

11)  Williams-Sonoma Q3 21 – 20/11 - another decent bellwether of the US economy this upcoming week is Williams Sonoma, who specialise in a range of household cookware, bakeware, and furniture. It is one of the biggest retailers in this space and also owns the Pottery Barn and West Elm brands, and saw its shares hit record highs in October after the business managed to shrug off the store lockdowns to post a decent set of Q1, as well as Q2 numbers due to a significant increase in on-line sales. In Q1 these rose by 30% and in Q2 rose again by 46%. Q2 profits also saw a big rise in revenues of 8.8% to $1.49bn, with e-commerce making up 76% of its overall sales. While profits also blasted through expectations in Q2 the company suspended its full year outlook due to the pandemic. This cautious approach prompted a modest but temporary pullback back in August, and as we head towards year end, we could well see consumer spending patterns slow down, particularly as some of this year’s revenues may well have been brought forward due to lockdown. Profits are expected to come in at $1.49c a share.