Must read: H&M, LVMH, Sainsbury’s, Superdry, Direct Line

Our head of investment Victoria Scholar examines retail stocks as European equities trade lower.

GLOBAL MARKETS

European markets are hovering around the flatline with the FTSE 100 trading modestly higher. Sainsbury's (LSE:SBRY) is trading at the top of the UK index after Bestway announced plans to grow its stake in the supermarket. Oil giants BP (LSE:BP.) and Shell (LSE:SHEL) are also near the top of the leader board as WTI, and Brent crude prices march higher.

Wall Street enjoyed a positive session thanks to better-than-expected US GDP figures and a near 11% surge for Tesla Inc (NASDAQ:TSLA) after earnings. Focus shifts to the latest US PCE price index data today for clues into the inflation picture stateside and the Fed’s next move.

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Elsewhere European natural gas prices fell for the fifth straight session, down 20% across the week, hitting the lowest level since September 2021.

H&M

Shares in H&M (OMX:HM B) are trading sharply lower, on track for their biggest daily drop since March 2022. Quarterly profit between September and November hit 821 million crowns, falling from 6.26 billion year-on-year and far below expectations for 3.67 billion crowns. The high street retailer was hit restructuring charges of around 5 billion crowns relating to its exit from Russia.

H&M has historically attracted customers thanks to its attractive low price point. In the inflationary environment when costs are going up, maintaining low prices to retain customers becomes increasingly challenging as the brand is unable to pass on these extra cost pressures to consumers. On top of that, the softening consumer and the slowing economy means potential customers have less disposable income to spend on discretionary items like fast fashion. Instead of raising prices, H&M is focusing on cutting costs, with the announcement of plans to cut staff back in November. The Swedish brand also faces stiff competition from its high street rival Zara, owned by Inditex which has in fact been successfully increasing prices to offset the macro headwinds, while still growing sales.

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Shares in Inditex are up by more than 17% over the last six months versus H&M which is down by 4% with the former demonstrating its ability to move more nimbly with the trends to maintain customer demand.

LVMH

LVMH (EURONEXT:MC) reported a 9% increase in fourth quarter organic sales growth to 22.7 billion euros. Sales at Louis Vuitton outperformed, topping 20 billion euros for the first time. Fashion and leader goods reached record levels with organic revenue growth of 20%.  LVMH raised its dividend to 12 euros a share from 10 euros year-on-year. However, the luxury giant said China suffered in the fourth quarter amid the surge in Covid infections.

Shares in LVMH hit a record high this month, surpassing a market cap of 400 billion euros for the first time, solidifying CEO and chai Bernard Arnault as the world’s richest man. Its range of diversified brands across fashion, perfumes, watches and jewellery including Tiffany & Co, Rimowa, Christian Dior and Fendi help the luxury group navigate the changing desires of the fickle fashionista.

With US equities suffering outflows at the start of 2023, investors are looking towards other regions including Europe for stock opportunities, playing into the hands of the luxury giants such as LVMH. China’s economic reopening could also provide a tailwind with the release of pent-up demand from the burgeoning middle class. However, while the strength of the dollar last year boosted demand from US consumers buying goods in Europe encouraged by the cheaper euro, this FX tailwind looks set to fade with the softening consumer stateside and the strengthening euro against the greenback. Plus, China’s spike in covid infections is another headwind that could stand in the way of the reopening trade benefit to LVMH.

SAINSBURY’S

British wholesaler Bestway Group has announced it is acquiring a 3.45% holding in shares of Sainsbury’s. While Bestway said it may purchase further shares in the future, both Bestway and Sainsbury's (LSE:SBRY) said the group is not considering a takeover offer for the supermarket.

Between August 2021 and October 2022, shares in Sainsbury’s suffered a difficult slide shedding around 45% of their stock market value. But since the lows, the supermarket has been regaining ground. Perhaps Bestway wanted to make the most of its relatively depressed share price before the stock regains further ground.

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In February 2021, Bestway completed its acquisition of Costcutter Supermarkets, highlighting the wholesaler’s desire to expand in retail through vertical integration which helped support its buying power and attracted additional retail sales. The purchase of Sainsbury’s share today adds to its retail exposure.

The Tesco, Booker deal in 2018 is another example of vertical integration between wholesaler and supermarket, helping Tesco (LSE:TSCO) to achieve better pricing and product availability.

Shares in Sainsbury’s are trading at the top of the FTSE 100 following the Bestway stake build, which represents a vote of confidence in the British supermarket. The stock has had a strong start to the year after a tough 2022 with gains accelerating today.

SUPERDRY

Shares in Superdry (LSE:SDRY) have plunged by more than 15% after issuing a full-year profit warning amid the tough economic outlook. It now expects to break even having previously guided for an adjusted annual profit before tax of between £10 million and £20 million. In the first half it reported an adjusted loss before tax of £13.6 million, worsening from a loss of £2.8 million in the same period last year.

Superdry’s earnings downgrade highlights the pressures facing UK consumers with sky high inflation and the economy teetering on the brink of a recession. Investors have fallen out of favour with the stock which is down by more than 90% over the past five years. Despite enjoying a boost to warm winter clothing demand and a record for jacket sales over Black Friday, investors remain cautious. It recently locked in an £80 million refinancing deal with a US hedge fund but at higher interest rates given the monetary tightening environment.

DIRECT LINE INSURANCE

The CEO of Direct Line Insurance (LSE:DLG) Penny James is stepping down with immediate effect after nearly four years at the helm. Under her tenure since May 2019 which included the covid era, shares in Direct Line have shed around 50%. This includes a plunge in the shares earlier this month after the insurance group scrapped its 2022 dividend and issued a profit warning, forecasting a full-year loss. Extreme weather, inflation pressures and the war in Ukraine have resulted in rising costs and higher claims for the group.

While the chief commercial officer Jon Greenwood has been appointed as interim CEO, the hunt for a successor poses some near-term C-suite uncertainty for Direct Line.