The week ahead – UK spring statement, CPI, Fevertree and Kingfisher results

UK Spring Statement – 26/03 – When the Chancellor of the Exchequer Rachel Reeves stood up to announce her budget back in October last year, there were many people warning that the measures announced could have the opposite effect to the one intended. With productivity in the public sector already lagging well behind the private sector, many were warning that without improvements in the former that increasing tax thresholds, as well as other business taxes was likely to be tax negative, and could well slow the economy markedly. These pleas were ignored by those in government and sure enough, here we are six months later and the economic outlook looks even bleaker than it did back in October. This morning’s announcement by the ONS that Treasury borrowing is already over £20bn above OBR projections announced at the budget shouldn’t have been too much of a surprise to those who were warning that the government's approach to tax and spend might have chilling effects on economic confidence. Sadly these warnings were ignored and here we are with many businesses going into full hunker down mode as the cumulative effects of the budget have prompted many to pause hiring, as well as reduce headcount and push up prices as well. When the OBR outlined its forecasts at the budget it downgraded its growth forecast for the UK economy to 1% for 2024, rising to 2% in 2025. At the time even this seemed optimistic and the Chancellor got further bad news this week when the OECD cut its growth forecasts for 2025 to 1.4% from 1.7%. and to 1.2% in 2026. Even this seems somewhat optimistic when you consider the recent UK January GDP numbers which showed the UK economy got off to a poor start to 2025, with a sharp slowdown in both the manufacturing and construction sectors. With inflation still a clear and present danger and unemployment edging higher again the Chancellor is coming under increasing pressure to take further measures to boost optimism as we head into 2025. Earlier this month the Chancellor was at pains to try and deflect the blame for the UK economy’s current woes by blaming US President Trump with his threats of trade disruptions and higher tariffs. Sadly, she isn’t fooling anyone given that Trump only took office on January 20th and many of the UK’s problems were pretty obvious before then, and could well worsen when the new tax year begins as businesses try and absorb the new national insurance thresholds, along with increase in business rates and the minimum wage. With UK consumers also having to contend with an average £600 a year rise in costs from April in the form of higher prices from the likes of broadband, council tax, transport, water and energy, the economic outlook looks more uncertain than ever. This is a crisis of her own making and if she thinks that raising taxes further will fix them then she is sadly mistaken. Hard decisions on government spending are needed and given the mood music we are currently hearing from the government benches it is far from certain that this government has the stomach for making them. It was interesting to note that earlier this month the OECD suggested that Scottish politicians needed training to improve their understanding of finance and economics. It’s a valid point, but why stop there it’s not as if our politicians in Westminster wouldn’t benefit from similar guidance when it comes to economic matters.           

UK CPI (Feb) – 26/03 – Since falling to 1.7% in September UK CPI has almost doubled, rising to 3% in January, well above forecasts of 2.8%, putting it at its highest level since March last year. Core prices also jumped sharply to 3.7% from 3.2%, dealing a blow to expectations that we might see further rapid rate cuts after the Bank of England cut rates again at its recent meeting. What is more worrying for UK consumers is that the central bank sees headline inflation rising further this year, potentially as high as 3.7% in Q3 of this year with energy prices being the main driver. This ought to be a shot across the bows of the UK government in respect of its economically illiterate energy policy, sadly it's likely to be ignored. The recent decision by the Bank of England to keep rates on hold serves to underline these concerns, however on the flip side of the coin they are also right to be concerned at the weakness of the economic outlook. One of the biggest components of the spike in inflation in January was transport costs in the form of airfares, while food inflation is also on the increase. With a variety of other costs set to kick higher in April the Bank of England will be reluctant to countenance any idea of rapid rate cuts yet, although we could see some action towards the end of the year when the MPC is convinced that the upward tick we are seeing now has started to dissipate. This may well happen organically though not for the reasons the Bank of England will like, namely an economic slowdown as demand slows.           

UK Retail Sales (Feb) - 28/03 – This is another area that serves to highlight the weakness of the UK consumer, having seen a weak end to 2024, with December seeing a -0.6% decline we did manage to see a modest rebound in January of 1.7%, the first rise since August driven primarily by food sales probably at the expense of eating out. Sales in non-food sectors however remained subdued while online sales also slowed. This rebound is certainly welcome; however, it also suggests that after 4-months of keeping the finances in check, consumers may have felt compelled to spend a little, and perhaps think towards the summer in terms of looking to book a summer holiday. It is usually in January and February that consumers start to look ahead so it will be interesting to see if the rebound we saw in January carries over into February, with some sectors hoping for a Valentine Day boost as well. According to the British Retail Consortium numbers for February consumers remain cautious with contractions in bars and pubs, sports, and supermarket spending.         

UK and European Flash PMIs (Mar) - 24/03 – Services are the one area across Europe and the UK that appears to be propping up economic activity, whether it be in France, Germany and the UK. In February we did see some modest improvements in manufacturing but the sector still remained in contraction, with a reading of 45.8 in France and 46.5 in Germany. In the UK the sector went from bad to worse as the outperformance that we had been seeing towards the end of last year, finally gave way to a further slowdown from 48.3 in January to 46.9. The services sector has been performing better but even here high energy prices are slowly strangling economic activity here as well. In Germany we saw 51.1, while France sank even further to 45.3. In the UK, services activity remained steady at 51, on the headline number but the amount of new work continued to slow along with employment.

Travis Perkins FY 24 – 26/03 – With last week’s results delayed, the shares have dropped even further after the auditor asked for more time to complete the numbers. With no new date announced the markets have done their worst sending the shares briefly to fresh multi year lows. The ferocity of the market response is understandable coming so late in the day to announce a delay it must have been obvious that even allowing for the disruption of your CEO stepping down to ill health that the numbers might not be ready. Will we get them this week? Who knows as there isn’t anything on the website to say when they might get published.             

Kingfisher FY 25 – 25/03 – DIY retailers have had a rough ride of it in recent years, with the increase in the cost of living, weighing heavily across the sector. The increases in the costs of raw materials have eaten heavily into margins, as well as the capacity of consumers to pay those higher prices. While B&Q and Screwfix owner Kingfisher has performed better than most of its peers the shares are still well below the peaks we saw in September of last year. The collapse in consumer confidence in the leadup and after the Autumn Budget saw the shares find a modest base earlier this year at around 227p. In Q3 Kingfisher reported Q3 sales of £3.2bn as total like for like sales fell 1.1%. On a regional basis Screwfix proved to once again be the saving grace with a 4.6% rise in Q3 reported sales of £681m. B&Q sales fell 1.1% to £936m. The French business once again proved to be a colossal drag with a 4.3% decline in like for like sales. In December Kingfisher announced the sale of its Romanian business to Altex Romania for €70m in a deal that is expected to complete sometime in the next fiscal year. For the full year, trading expectations are for UK and Ireland markets to see flat growth with profits before tax expected to come in between £510m to £540m. This was a modest downgrade on the £550m upper limit pre the Q3 numbers. The company says it expects to deliver all of the £120m cost reductions for this year as previously guided. The impact of the budget on its UK cost base is expected to be circa £31m, while in France various changes there are expected to cost £14m before any mitigations. Kingfisher said that only some of these extra costs could be mitigated which means there will be an impact on overall profitability.

Fevertree FY 24 – 25/03 – Very much a great British success story, when Fevertree first came on to the stock market in November 2014 the company was valued at £154.4m, floating at 134p per share. In the immediate aftermath of that flotation the shares fizzed higher, peaking in November 2018 at 4161.5p. Since then, the shares have gone a bit flat, sliding to Covid lows of 885p before recovering to 2,876p at the beginning of 2022, before beginning their current decline. It’s hard to put a single reason for the slow decline in the share price since those 2022 peaks but some of it can be attributed to a certain amount of growing pains. Touted as a refreshing newcomer to the carbonated drinks market it is still one of the leading exporters of mixer drinks, however it would appear that the deal signed with US based Southern Glazer's wine and spirits, while boosting revenues threw up some unexpected challenges, especially in relation to margins and integration costs. In 2018 gross margins were in excess of 53%, and had fallen to 46.8% by the middle of 2020, although Covid probably had a lot to do with that, as bars closed, although shop sales went up with customers cooped up at home. When looking at the wider numbers it is clear that its US market is the strongest one. In its last set of numbers, the company reported H1 total group revenues of £172.9m, a decline of 2%, with the US business seeing a 7% increase to £60.3m. The UK market saw a 6% decline in revenue to £50.9m, with gross margins of 35.9%, although that was an improvement on the previous period of 30.7%. For full year 2024 total revenue is expected to come in at about £360m, a rise of between 4% and 5%, with an expectation of seeing 600bps of an improvement in gross margin. In January the company signed a strategic deal with Molson who acquired an 8.5% stake in the company with the proceeds of £71m returned to shareholders last month in the form of a share buyback. 

GameStop Q4 24 – 25/03 – Having spent so much of the early part of this decade on the front page, this meme stock has settled down into a less volatile range over the last 12 months with a modest base just below $20 a share, which is a far cry from the heady heights of 2021. We did see a period of volatility in May and June of last year on reports that Keith Gill aka “Roaring Kitty” had resurfaced on social media after a 3-year hiatus. The business has continued to struggle for profitability despite the expertise and enthusiasm of its front-line staff. In Q3 revenues fell 20% to $860.3m, although the business did manage to return a profit of $17.4m, helped by an improvement in profit margins which rose to 2.02%. In an attempt to cut costs and streamline the business further CEO Ryan Cohen announced last month that the company would be looking at selling its Canadian and French operations, with the CEO laying the blame at a combination of high taxes, liberalism, socialism, progressivism, wokeism and DEI. Q4’s numbers will be especially important in the context of how well the wider retail sector performed over the Christmas period. Last year Q4 saw revenues of $1.8bn, while net sales for the year 2023 were $5.27bn, down from $5.9bn in 2022. This year will struggle to get even close to that number given that in the first three quarters of this year saw sales of $2.5bn combined. This is quite a decline which can be partly attributed to the closure of over 280 stores worldwide. Profits are expected to come in at 0.09c a share.