Daily market update: Tesco, Imperial Brands, Vodafone

A sharp jump in the price of oil weighed on financial markets, leaving investors with no choice but to stare the inflation monster in the eyes.

Brent crude jumped 3.7% to $103.88 per barrel amid ongoing attacks on tankers in the Middle East and hurricane-related production disruption in the Gulf of Mexico.

Concerns around potential damage from Tropical Storm Isaias has led Shell and Chevron to curtail offshore operations in the Gulf, adding to supply concerns that were already front of mind thanks to ongoing Middle East conflict.

The higher the oil price goes, the more volatility to expect on financial markets. Bond investors have made it clear they are concerned by the prospect of rising inflation feeding into higher interest rates and potentially economic setbacks. Equity investors have been relatively relaxed versus bond investors thanks to positive corporate news flow keeping spirits high. But that situation might not be sustainable if higher costs start to crimp corporate profits.

Just as the weather is starting to turn colder as autumn sets in, so does the prospect of a chill starting to bite equity markets unless oil goes into reverse.

Tesco

There is a lot to like about Tesco’s results. It’s taken a lot of hard work to become the UK market leader, and a lot of effort now goes into defending its market share. Tesco’s half-year results suggest it isn’t short of an idea or three to stay on top. New product launches, more personalised offers, and meal planning assistants are just some of the initiatives helping to keep shoppers interested and money going into the till.

A high oil price creates a challenging backdrop, particularly as consumers are facing a spike in energy costs from January when the energy price goes up by a potential 25% to 30%. There is a lot of talk around whether we’re facing another cost-of-living crisis, and the government is expected to announce measures to help households at the Budget later this month.

When it costs more to fill up the car, to do the weekly food shop, and to pay for other essentials, the natural response from shoppers is to make cutbacks. This suggests that trading in the run-up to Christmas could be more challenging for the likes of Tesco. However, the grocer has upgraded its profit forecast in a show of confidence. Investors are loving the news, helping the shares buck a red day for markets.

Tesco has been clever in laying out its stall. It has taken the dual-pronged approach of cutting prices where possible to appeal to the cost-conscious shopper and stop Aldi and Lidl eating its lunch. At the same time, Tesco has increased its range of premium items under the Finest label, thereby striking a chord with individuals who can afford fancier foods. That’s helped to win customers from Waitrose. Admittedly, Sainsbury’s is following a similar strategy but there remains a wide enough gap in terms of market share for Tesco not to sweat too much.

Tesco’s strategy of having something for everyone also extends to the way in which customers can buy from the grocer. In-store is the dominant channel, yet the Whoosh rapid home delivery service is proving to be a bigger success than some people originally thought it would be. Tesco’s share of the online grocery market continues to grow fast, now at 36.7% in the UK. Even the wholesale arm, Booker, remains relevant even if it isn’t growing as fast as the rest of the business.

Uniqlo (Fast Retailing)

Forget Shein, Zara or Temu, the big name really going places in retail is Uniqlo. Parent company Fast Retailing has reported full-year results that puts many retailers to shame.

Uniqlo’s business outside of Japan saw profits jump 44.1% year-on-year as shoppers lapped up its affordable, yet decent quality products with a sustainability angle. Even the well-established Japanese operations continue to go from strength to strength, with profit up 8.1% year-on-year.

Uniqlo is giving Marks & Spencer a run for its money with fashionable basics designed to last. They aren’t the cheapest, but they’re still priced competitively to appeal to the mass market.

Fast Retailing has ambitions to be the global number one brand in retail. It is investing in staff, pushing the sustainability agenda hard, opening new stores at a rapid pace, and creating clothes people want to wear again rather than chuck after one or two times. Its progress to date suggests the company has hit upon a winning formula and is executing the strategy with great success.

Imperial Brands

Imperial Brands has been so busy buying back shares in recent years it’s a wonder there are any left.

The company’s latest bumper buyback accompanies a trading update which confirmed it is on track for full-year targets and is an effort on the part of management to affirm their faith in the longer-term outlook.

Over the last six years Imperial Brands has delivered nearly £13 billion through dividends and buybacks and reduced the number of shares in issue by more than 21%.

This achievement, plus its defensive credentials, helped Imperial Brands shares to chalk up respectable gains over the period, though the stock has run out of puff in the past six months.

The challenge facing tobacco companies is the decline in smoking in the West, driven by consumer habits and regulation, which is pressuring volumes. However, the company’s pricing power with those who still smoke has helped to keep revenues rising.

So-called ‘next generation products’ like e-cigarettes, vapes and heated tobacco are growing, as Imperial looks to replace lost cigarette volumes but they account for a small proportion of overall sales.

Vodafone

The integration process after a merger is notoriously fraught with challenges, so to see Vodafone upgrade its targets for its VodafoneThree combination in the UK is encouraging.

The annual cost-savings target has been hiked by a meaningful amount, and earnings and free cash flow targets have also seen a big uplift.

After years of going nowhere on the stock market, today’s announcement is the latest feather in the cap for chief executive Margherita Della Valle as she continues to execute on a turnaround of the group.

Since taking over at the beginning of 2023, Della Valle has delivered a total return of 75%, according to ShareScope data, which compares with a return over the previous decade of just over 1%.

TSMC / Samsung

TSMC’s (Taiwan Semiconductor Manufacturing Company) teaser ahead of its third-quarter earnings revealed a healthy revenue increase to suggest AI-related demand for its chip fabrication services remains buoyant.

A muted response in pre-market trading in its New York listed shares to a 50%-plus increase in revenue, no mean feat given the scale TSMC now operates at, shows just how high the expectations bar is set for the company.

It may also suggest investors are keeping their powder dry ahead of the full results next week, which crucially should include forward guidance and outline the firm’s plans for capital expenditure.

If TSMC is continuing to invest heavily in expanding capacity it would act as a vote of confidence in the wider AI theme.

Samsung Electronics delivered its own eye-catching number with quarterly operating profit set to top 100 trillion Korean won – even if this looks a bit less impressive when converted into dollars at around $75 billion.

Samsung continues to benefit from unprecedented levels of demand associated with AI, particularly for memory chips. However, the numbers were a smidge below expectations and chip price increases slowed a touch, which led to some concern margins might be nearing their peak.