Market snapshot: US retail sales and AO World update

Our head of markets Richard Hunter considers the major indices and the next phase for small-cap retailer AO World following a bruising period.

The release of the Federal Reserve minutes was met with a collective shrug of the shoulders, as investors were deprived of any new news.

Indeed, the comments from those minutes has become partially irrelevant following developments since. In particular, a red-hot jobs report and the possibility of inflation having peaked are currently on the watchlist for investors and the consensus is now that the next Fed rate hike will be one of 0.5% as opposed to the 0.75% rises previously seen. One element which has not changed is the Fed’s attitude to inflation, which it continues to fight against with an aggressive monetary policy, and for which it recognises the potential harm to economic growth should the screw be turned too tightly.

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In the meantime, the major indices continue a slow grind towards recouping the losses incurred in the year to date, whereby the Dow Jones has fallen by 6.5%, the S&P 500 by 10% and the Nasdaq by 17%. A tepid retail sales reading and some slightly disappointing numbers from retailer Target Corp (NYSE:TGT) undid some of the previous day’s optimism on the back of better results from Walmart Inc (NYSE:WMT) and Home Depot (NYSE:HD).

The muted end to the US trading session and a lacklustre performance across Asian markets left the FTSE 100 with little inspiration, with the index opening fractionally lower, reducing its gain in the year to date to 1.5%. The decline was additionally due to a raft of constituents going ex-dividend, including such heavyweights as HSBC (LSE:HSBA) and Imperial Brands (LSE:IMB).

In early exchanges, ex-dividend stocks peppered the top of the loser board, while the oil majors and the house-builders made a brave attempt to advance following share price pressure over recent days.

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AO World (LSE:AO.) has endured a torrid year, buffeted by the economic headwinds which have blown across the retail sector, as well as labour shortages and supply chain disruptions.

The stock was also hit earlier this year by reports of credit insurance being closed to its suppliers and the company subsequently entered a fundraising exercise of £40 million in an effort to shore up the balance sheet.

Throughout the release, management mood is defiantly upbeat, pointing to a 52% increase in revenues over the last two years, an additional four million customers since the beginning of the pandemic, and a strategic shift which involves an expansion into a larger addressable market, including laptops, televisions and small domestic appliances. In addition, a growing installation and recycling service competes the strategic shift.

The loss of the German business, where customers returned to pre-pandemic behaviour more quickly than expected (and therefore less reliant on online shopping) will result in revenues which accounted for 12% of the group total. More broadly, group revenues for the last year fell by 6%, and the resultant pre-tax loss of £37 million compares with a profit of £20 million in the previous period.

The company now enters into a new phase after a bruising time. Over the last year, the shares have declined by 82%, as compared to a marginal 0.6% gain for the FTSE All-Share index, and the market consensus of the shares as a hold reflects a wait and see approach as the company attempts a revival. In the meantime, vague bid speculation has not materialised into anything concrete, although the suspicion remains that potential suitors may still be running the slide rule over the company.