FTSE 100 Rises as Shop Price Inflation Falls but boohoo Investors Cry as Stock Drops 12%

After an unflattering performance yesterday, the FTSE 100 has essentially dropped back to 7,500 points — where it started the year. Nonetheless, it's not entirely gloomy this morning. According to the latest British Retail Consortium-NielsenIQ tracker, shop price inflation continues to drop and has hit a year low at 6.2%.

Food inflation fell to 9.9% while non-food inflation eased to 4.4%. More encouragingly, food prices actually fell 0.1% on a month-on-month basis as price cuts seem to be what retailers are competing for now. According to Helen Dickinson, CEO of the British Retail Consortium, “Customers who bought dairy, margarine, fish and vegetables — all typically own-brand lines — will have found lower prices compared to last month”.

Although shoppers alike will celebrate the news that inflation continues to fall, retailers might have to be worried if the current trend continues. After all, JPMorgan released a note a number of weeks ago, warning that a potential deflationary environment could erode the top and bottom lines of retailers.

That said, John Choong, Senior Equity Research Analyst at InvestingReviews said:

“JPMorgan's pessimism isn't unfounded as retailers continue to try to outdo each other with price cuts. However, we hold a more optimistic view that positive real wages should spark a return to discretionary spending and limit trading down to lower-margin products. And if Marks and Spencer's stellar performance so far is anything to go by, this should be sufficient to offset the decline in prices.”

On the other side of the aisle, boohoo has been left crying with its shares deep in the red this morning after it reported a disappointing set of interim results.

H1 sales fell off a cliff and were 17% lower compared to last year at £729.1m from £882.4m. Its pre-tax profit wasn't any better either as it lost £9.1m, compared to the £6.2m profit it had last year. The guidance wasn't particularly bright either with FY24 revenues now projected to decline by 12-17%, as the retailer targets more profitable sales within its own labels.

However, not all is lost as adjusted EBITDA margins are now expected to come in between 4-4.5% — in line with prior guidance. This is thanks to the company's strong progress in gross margin and cost controls. The former strengthened in the half as the board targeted more profitable sales in its labels. Alongside this, the firm identified more than £125m of annualised cost savings due to stock reductions and a better supply chain.

On the results, Choong commented:

“boohoo's results don't make for pretty viewing, especially when the stock is almost down 95% from its all-time high in 2021. But those who bought in at that point should've been aware that the shares were tremendously overpriced. However, that doesn't seem to be the case today as Mike Ashley has continued to load up on his position in the e-commerce retailer.

There are also a number of encouraging signs that the market seems to have ignored. While management's move to target better margins will certainly instil short-term pain as evidenced in its latest results, inventory reductions and the shoring up of its supply chain are all positive moves. And although the turnaround will take slightly longer than previously anticipated, investors who can see through the current pain could reap the potentially lucrative rewards lying ahead. With discretionary spending taking a turn for the better, the medium-to-long term looks a little brighter for the industry."