We've been saying for a month or so now that the World Cup wasn't likely to save the high street.
Any boost from television and beer sales was always going to be temporary and of course, there's the reduced footfall as people stay at home to watch the football instead of shopping.
So we weren't too surprised at the cautious tone of Dixons owner DSG International's annual results.
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But judging from the market's reaction, plenty of other people were...
As we mentioned several times in the past month or so, all the recent excitement over the impact of the World Cup on retailers has been hard to understand.
DSG was among the main beneficiaries. The group posted a modestly upbeat trading update last month, saying that second half trading had been better than expected due in large part to demand for flat panel TVs ahead of the World Cup.
To be fair to DSG, the company did point out at the time that it remained "cautious about the speed of any long term recovery." But everyone was too busy looking at those flat-screen TV sales and snapped up shares.
Yesterday, the company's message was little changed. "Despite the encouraging performance in the second half, in which the World Cup played a part, we remain cautious on the prospects for consumer confidence and expenditure over the next 12 months," said chief executive John Clare.
Pre-tax profits for the year to April 29th were also in line with expectations, slipping 4% on the previous year, to £318.2m. And the group is getting rid of underperforming mobile phone chain The Link. Mobile phone group O2, now owned by Spain's Telefonica, intends to buy DSG's 60% stake for about £30m.
And yet shares fell 4% to 184.75p.
It's not that we're surprised that investors want out of DSG. It's just that we're not sure why they'd want to be in there in the first place.
Of all the sectors under threat from the move by supermarkets into non-food sectors, electrical retailers are among the most vulnerable. Margins in the sector are already razor-thin.
That means you need to be a big player to be able to buy in the levels of stock required to sell at a consumer-friendly price and still be able to make a profit. And they don't come much larger than supermarkets.
"What we are seeing is the supermarket groups beginning to take a larger share of the goods that Dixons traditionally has shifted through its stores," Brian Tora of Gerrard Ltd told Bloomberg.
When you can buy a perfectly serviceable DVD player for less than £30 at Tesco or Asda, it makes the higher-end options available at the likes of Dixons and Comet a much harder sell.
So it's unsurprising that supermarkets are among the few retailers coming out with reasonably sound results at the moment. During the three months to June 17, J Sainsbury, the UK's third-largest supermarket group, saw sales at stores open for at least a year rise 5.7%, excluding petrol sales.
Investors in J Sainsbury are understandably cheered at the group's turnaround. It looks set to become the UK's second-biggest supermarket group, beating Asda into third place.
But market share isn't the be all and end all of retailing. If it was, shops would give away all their goods for free or perhaps even pay customers to take them. But of course, that's unsustainable.
And that's part of the problem at Sainsbury's. A large part of the group's gains have been driven by price-cutting. But at the same time, "rising energy costs and competition remain a concern," said chief executive Justin King. As Mr Tora puts it "it's a strategy that can be a little bit dangerous when looking at the bottom line."
And in reality, Sainsbury's might be about to overtake Asda, but its market share gains are still anaemic compared to market leader Tesco. According to market researcher Taylor Nelson Sofres, Tesco's market share has risen by 1.4% since the start of this year, while Sainsbury has risen by just 0.2%.
Tesco is also exploring opportunities in other countries. The supermarket giant is in talks with several Indian firms over potential joint ventures, Reuters reported. The group is a long way off entering the market "it will be more than a year," said finance director Andrew Higginson but the fact remains that Tesco is the best-placed of all the UK supermarkets to make a decent go of reducing its reliance on UK spending.
And yet shares in Sainsbury have risen 12% in the past year, compared to a mere 7% rise in Tesco's share price. According to Digital Look, Sainsbury trades on a forecast p/e of about 23 compared to just under 15 for Tesco.
We're not necessarily saying that you should run out and buy Tesco we're sure the UK retail sector's troubles have only just begun. But it certainly suggests that Sainsbury's shares are overvalued.
Turning to the wider markets...
The FTSE 100 ended just higher on Wednesday, rising 6 points to close at 5,665. Electrical retail group DSG International was the main faller, while high street bank HBOS fell 2% to 938.5p as a trading update failed to inspire investors. For a full market report, see: London market close
Over in continental Europe, the Paris Cac 40 gained 4 points to 4,774, while the German Dax rose 9 to close at 5,503.
Across the Atlantic, US stocks made strong gains. Crude oil supplies hit an eight-year high, boosting sentiment, while decent results from investment bank Morgan Stanley and logistics group FedEx also cheered investors. The Dow Jones Industrial Average rose 104 to 11,079, while the S&P 500 closed 12 points higher at 1,252. The tech-heavy Nasdaq rose 34 to 2,141.
Investors were also more upbeat in Asia. The Nikkei 225 soared 491 points to 15,135. Only one of the 225 stocks in the index declined.
This morning, oil was edging higher in New York, trading at around $70.55 a barrel. Brent crude was also higher, trading at around $69.
Meanwhile, spot gold was higher too, trading at around $591.50 an ounce. Silver also made gains, rising to $10.52 an ounce.
And in the UK this morning, housebuilder Crest Nicholson reports that it saw net profit fall 19% in the six months to the end of April. The average selling price fell 10% to £188,000 while costs rose 6.1%.
And our two recommended articles for today...
How big is the inflation threat really?
- Is inflation as much of a problem as recent data suggests? Jeremy Batstone at Charles Stanley isn't so sure that the increasingly hawkish noises coming out of central banks across the world are justified. We may not always agree with him - but his opinions are always worth reading. To find out more on the inflation picture in the world's major economies - and how central banks are likely to respond - click here: How big is the inflation threat really?
What next for gold?
- Gold has a special status amongst commodities: it is indestructible, infinitely divisible and the unique residence of wealth. Even though most commodities may fall if the global economy goes into a slowdown, the story of gold will be very different, say Andrew Selsby and John Robson at RH Asset Management. How far it falls and for how long depends on unique factors. And last week gold reached an important turning point. To find out where it will go from here, see: What next for gold?
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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