The Week Ahead: UK Unemployment, Retail Sales; Royal Mail, Vodafone Results

Read our pick of the main stories to look out for in the week commencing 15 November, and view our key company earnings schedule.

This week, Michael Hewson runs the rule over UK unemployment and retail sales, and previews company updates from Royal Mail, Vodafone, Walmart and more. He also looks back at the jump in US CPI to 6.2% in October, and assesses the possibility of a similar surge in UK CPI ahead of the latest figures on Wednesday.

OUR TOP 3 STORIES:

UK unemployment (September) – Tuesday

When the Bank of England decided not to raise the base rate to 0.25% earlier this month, they attributed their reticence in part to the potential effects that the end of the furlough scheme could have on the labour market. The Bank’s Monetary Policy Committee voted 7-2 to keep interest rates on hold, despite having previously signalled that a rate hike may be necessary to curb expectations of rising inflation. While there may be some wisdom in holding the base rate at 0.1%, the central bank has been criticised for “bottling” the rate hike, after its forward guidance led markets to price in a rate rise. It is difficult to underplay the damage that the bank has done to its credibility through all this. 

The release of the latest UK unemployment statistics on Tuesday, which are expected to indicate a continuing recovery in the British labour market, could add to existing inflationary pressures, given that lower unemployment has historically corresponded to higher prices. The number of unemployed people in the UK, as measured by the labour force survey and based on the definition of unemployment set out by the International Labour Organisation (ILO), fell to 4.5% of the population between June and August, down from 5% at the start of the year. The claimant count also fell, dropping from 7.2% in January to 5.2% in September. With over 1m vacancies in the UK economy, headline unemployment could decrease further, though the number of new hires could be offset by redundancies linked to the end of the furlough scheme. The ILO measure of UK unemployment is therefore expected to remain flat at 4.5% for the three months to September. 

Royal Mail half-year results – Thursday

Royal Mail shares have struggled since July, even though the release of the company’s Q1 results that month showed that revenue was up 12.5% from the year-ago period, and up 20.5% compared to the same period in 2019. Investors may have responded to perceived weakness behind the headline revenue growth – for instance, the parcels division saw a 13% slowdown in volumes as shops reopened. However, this decline needs to be viewed in context, since 2020 provided a high base, as lockdowns and shop closures boosted demand for parcel deliveries. Royal Mail reiterated its full-year guidance in July, but then in September the company said that revenue was only 8.2% higher year-on-year, and up 17.7% from 2019, marking a slowdown from the Q1 numbers. The September update also revealed that domestic parcel volume was down 5% year-on-year, and that costs increased slightly – hardly surprising given the similar problems being faced by the likes of FedEx, which has increased wages for new hires. In the wake of the September update, Royal Mail’s share price fell by almost a fifth, but has picked up slightly since early October. Royal Mail’s half-year adjusted operating profit is estimated to be between £395m and £400m, with the second half of the year expected to deliver a better performance on profits and margins.  

Vodafone half-year results – Tuesday

While Vodafone reported better-than-expected Q1 revenue of €11.1bn in July, the Vodafone share price has continued to slide. The stock is down more than 8% year-to-date, and hit its lowest closing price of the last 12 months – 106.94p – on 3 November. This is despite organic service revenue increasing 3.3% in Q1, beating expectations of 1.91%, driven by strong performance in Germany. Restrictions on cross-border travel dented roaming revenue – a problem that is not unique to Vodafone – but roaming revenue is expected to improve as travel restrictions are lifted. Given the economic slowdown in Europe, particularly in Germany where Vodafone derives almost 40% of its revenue, there is a risk of underperformance in the company’s half-year figures. That said, investment in 5G to support future growth remains ongoing, and the company said it was on track to meet its full-year EBITDA target of between €15bn and €15.4bn, with €7.48bn of that expected in the first half. Total half-year revenue is expected to come in at €22.1bn.

OTHER KEY EVENTS:

MONDAY 15 NOVEMBER

China Retail Sales (October) 

China’s retail trade is expected to have grown 3.6% in October, down from 4.4% in September. The September trade numbers showed that while exports remained strong, imports were still very much on the soft side, as weak demand continued to weigh on the domestic part of the Chinese economy. Retail sales in Q3 were disappointing compared to Q2. In Q2, the lowest number was a 12.1% expansion in June. Since Q2, we’ve seen a sharp slowdown, with growth of 8.5% in July and 2.5% in August, before the slight uptick in September. The outlook continues to remain tepid as Chinese authorities persevere with their zero-covid strategy, while contending with surging energy prices. All this has made it difficult for China’s industrial sector to keep going. Recent manufacturing PMI numbers remained weak, slipping to their lowest level since February 2020 last month. Meanwhile, growth in industrial production slowed to 3.1% in September, down from 5.3% in August. The trend isn’t expected to have improved in October, with growth of 3% forecast.

TUESDAY 16 NOVEMBER

US Retail Sales (October)

US retail sales for September came in better than expected, rising 0.7%, against a forecast of -0.2%. Meanwhile, the August numbers were revised up to 0.9%. The better-than-forecast numbers, along with the continued improvement in the US labour market, helped convince the US Federal Reserve that the economy was strong enough for it to proceed with its plans to start tapering its monthly asset-purchase programme from November. Consensus estimates are for a rise of 0.5% in October. 

Home Depot’s share price has increased 68% since the start of 2020, as quarterly updates have beaten estimates. In Q1, the US retailer posted another big beat for profits and revenue, as the trickle-down effect of US stimulus payments saw an increase in consumer spending. Sales came in at $37.5bn, well above Q4 sales of $32.26bn. Profits also smashed expectations of $3 a share, coming in at $3.86. Customer transactions also saw a big increase, rising over 19% to 447.2m. With such a high bar, it wasn’t surprising that management chose not to offer guidance in Q2, though they needn’t have worried, as Q2 profits came in at $4.53 a share, while revenue rose to $41.12bn, both beating expectations. Same-store sales decreased a touch, although total basket size was bigger. With the shares close to record highs, could Home Depot post another quarterly increase in revenue? It seems a tall order, given the slowdown in existing and new home sales in the past few months, along with higher raw materials prices and other related costs. Profits are expected to come in at $3.33 a share.

Walmart Q3 results

In Q2, Walmart posted expectation-beating profits of $1.78 a share, as revenue came in at $141.05bn, up from $138.1bn in Q1, also beating expectations. Same-store sales also rose more than expected, up 5.2%, prompting the company to raise its full-year profit forecast to between $6.20 and $6.35 share. Walmart’s share price reacted well to that Q2 update in August, climbing close to the record high of $153 that it reached towards the end of 2020. Since then, the shares have dipped, before returning close to the August level, as the split between online and in-store retail moved back in favour of stores after the economy reopened in the summer. Walmart has been leveraging the popularity of its online services over the last year, announcing the launch of Walmart+ – a new membership service – in Q3 2020 in a bid to compete with the likes of Amazon. As with other retailers, rising costs have eaten into the top line as extra staff were hired to help clean stores, stack shelves and get online orders out the door. The company hired more than 500,000 additional staff last year alone. Tougher comparatives from this time last year could test shareholder confidence when Walmart announces Q3 results on Tuesday, but Q3 could also be the calm before the storm as retailer supply chains are likely to feel the strain during the busy Thanksgiving and Christmas periods of Q4 How many more staff will Walmart have to recruit to meet demand? And, more to the point, how resilient are their supply chains to pre-Thanksgiving and Christmas demand? Walmart is also looking to diversify away from retail and into health care, acquiring MeMD earlier this year as it looks to build on its in-store pharmacy services. Profits for Q3 are expected to come in at $1.39 a share.

WEDNESDAY 17 NOVEMBER

UK CPI (October)

With UK CPI jumping from 2% in July to 3.2% in August, there was justified concern prior to the release of the September figure that we could see a surge towards 4%, as emergency government support measures came to an end, and food and energy prices went up. While we can probably expect to see further upward pressure on prices in the months ahead, price growth stabilised in September, dropping back to 3.1%. Earlier this month the Bank of England signalled that CPI could head towards 5%, but – in a huge own-goal moment – passed up the opportunity to signal that it was taking action to curb expectations of rising inflation when it kept the base rate at 0.1%. Core prices also softened in September, falling back to growth of 2.9% from 3.1% in August. However, this is likely to be only a temporary respite. October data could see headline CPI rise to 3.9%, and possibly even 4%, with core prices expected to be up 3.7%. A big rise in this week’s October numbers will shift the focus back on to the Bank of England, raising the prospect of a possible rate hike in December. Whether markets will price in a rate rise remains to be seen, after the shambles we saw at the beginning of November. Forward guidance is a huge part of how central banks guide market expectations regarding monetary policy. This month’s missteps by the Bank of England have made the markets’ task a lot harder than it needed to be.  

Target Q3 results

Target shares have been another outperformer this year. Although we saw a bit of a sell-off in the aftermath of Target’s Q2 numbers, the shares are now back close to their record highs from August. The Target share price is up over 40% year-to-date. Having adapted to the challenges of the pandemic, the business is building on the gains it made through 2020. Like Walmart, the company has had to adapt to rising costs and, with its position in the middle of the US retail pack, it has gained lots of new customers at the lower and upper end of the income stream in the US, as consumers spend their stimulus benefits. In Q1 Target posted sales growth of 22.9%, well above expectations of 10.1%, while revenue came in at $24.2bn. Net income rose to $2.1bn, up from $284m a year earlier, as shoppers spent more money on the likes of homeware and clothing, with average basket sizes rising 5% The company also saw store and website traffic rise by 17%. In Q2, net sales came in at an impressive $25.16bn, with same-store sales rising 8.7%, both above expectations, but well down from the 22.9% rise seen in Q1. Profits came in at $3.64 a share, beating forecasts of $3.40. The company also announced a new $15bn share buyback program. The reality is that, while sales growth has slowed, it was never going to be sustained at the levels of 20%+ seen in previous quarters, and that could well be true of Q3. As we look ahead to Q4 – traditionally retailers’ best quarter, thanks to Thanksgiving and Christmas – it will be interesting to see what sort of guidance Target offers in the context of the various problems it is likely to face, and how much higher its costs will be as it hires seasonal workers to cope with the extra demand on its logistics over the Black Friday, Cyber Monday, and pre-Christmas holiday period. Target has said it intends to invest up to $4bn over the next few years in new stores, as well as improve its online offering further. Profits are expected to come in at $2.80 a share.  

Having seen Q1 revenue rise by 84% to $5.66bn, Nvidia almost repeated the trick in Q2 with a 68% rise to $6.51bn, driven by gaming revenue of $3bn, while data centre revenue came in at $2.37bn. Profits came in at $1.04 a share, with the company saying it expects to see Q3 revenue rise to $6.8bn, despite concerns over chip supply. Management made little comment on the ARM deal, apart from saying that it was taking longer than expected to complete. With sector peer Qualcomm recently raising its own guidance on its chip production revenue, Nvidia shares have gone from strength to strength since August, surging to record highs last week after it launched a new suite of chip products called the Omniverse to specifically target the metaverse. The shares are currently up more than 130% year-to-date. Profits are expected to come in at $1.10 a share. 

FRIDAY 19 NOVEMBER 

UK Retail Sales (October)

The UK consumer appears to have gone into full reverse over the last few months. Since the 9.2% rise in retail trade in April, we’ve seen declines of -1.3% in May, -2.8% in July, -0.6% in August, and -0.2% in September, with only a pitiful gain of 0.2% in June. The lack of an uptick in September was particularly surprising given that UK petrol station forecourts were sucked dry as a result of the fuel supply panic. Over summer, there were reports of strong credit card spending on items like cinema tickets, outdoor events and restaurants, as UK consumers stayed in-country due to the various overseas travel restrictions. Anecdotal reports suggest that domestic leisure businesses, particularly in seaside resort areas, had their best season in years. While the fuel crisis did provide an uplift to fuel sales in September, it also meant that discretionary spending fell elsewhere, with home goods seeing a decline. This stands to reason – you can’t buy a table or chairs if you’re stuck in a petrol queue! There is, of course, the possibility that retail sales data could pick up from October onwards, as we head towards Black Friday and the pre-Christmas rush. Because of the various supply chain disruptions, consumers are being encouraged to start their Christmas shopping early, which could prompt a pull-forward effect as we head into year-end.

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Selected company results

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

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