Market news and updates from US retailer Target and IHG Group.

Market News

US equity markets drifted lower last night – S&P 500 (-0.8%); Nasdaq (-1.2%) – as investors digested further signs of weakness in China and the prospect of higher US interest rates. This morning in Asia, markets were mixed: Nikkei 225 (-0.4%); Hang Seng (+0.1%); Shanghai Composite (+0.4%). The FTSE 100 is currently trading 0.4% lower at 7,324. Companies trading ex-dividend this morning include Imperial Brands (1.21%), GSK (1.02%), Anglo American (2.13%), LSE (0.44%), Entain (0.72%), and Berkeley Group (1.42%).

Most Fed officials see “significant” upside risks to inflation that may require more tightening, the minutes of their July meeting showed. Still, cracks in the consensus were more apparent — though the FOMC decision to hike last month was unanimous, two policymakers on the broader Fed panel favored leaving rates unchanged or “could have supported such a proposal.” The 10-year Treasury currently yields 4.30%, while 10-year UK gilt yields moved up to 4.70%, the highest level since 2008. Sterling buys $1.2733 and €1.1703, while gold has drifted below $1,900 an ounce.

The Chinese shadow bank whose liquidity crisis has fanned fears about financial contagion plans to restructure its debt and hired KPMG to conduct an audit, people familiar said. Zhongzhi Enterprise will also sell assets to repay investors. The housing slump which contributed to the wealth manager’s difficulties is much worse than official figures show, according to property agents and private data providers. Prices are down at least 15% in prime areas of Shanghai and Shenzhen.

The excess savings US households built up during the pandemic are set to be exhausted this quarter, research from the San Francisco Fed said, removing a key support for consumer spending.

Source: Bloomberg

Company News

Yesterday afternoon, Target released its Q2 results, which reflected stronger-than-expected profit performance on softer-than-expected sales. In response, the company trimmed its full-year guidance, although the shares still traded up 3% during yesterday’s session.

Target is a US general merchandise retailer, known for its big-box format. Last year, the group generated sales of $109bn from more than 1,900 stores and through its digital channels. The group has undertaken a multi-year strategy to transform itself in the face of fierce competition by appealing to shoppers with a compelling product line, a suite of convenience-driven fulfilment options, competitive prices, and an enjoyable shopping experience.

In the three months to 30 July 2023, the company generated sales of $24.8bn, down 5.4% in comparable terms, slightly below the consensus forecast of $25.2bn. The company enjoyed continued growth in frequency businesses (Essentials & Beauty and Food & Beverage) partially offset declines in discretionary categories. Store comparable sales fell by 4.3%, with growth driven by a 4.8% decrease in traffic and 0.7% fall in average transaction amount. Digital sales fell by 10.5% and now account for 17% of the total.

The gross margin jumped from 21.5% to 27.0%, reflecting lower markdowns and other inventory-related costs, lower freight costs, retail price increases, and lower supply chain and digital fulfillment costs. These benefits were partially offset by higher inventory shrink, which increasingly includes theft and organised retail crime.

Operating income grew from $321m to $1,197m, with the margin rising from 1.2% to 4.8%, driven by disciplined cost management, partially offset by continued investments in pay and benefits and inflationary pressures throughout the business.

Adjusted EPS grew by more than four times to $1.80 and was above the high end of the company’s guidance of $1.30-$1.70. The strong performance reflected a meaningful profit recovery from last year’s inventory actions. Inventory at the end of Q2 was 17% lower than last year, reflecting a 25% reduction in discretionary categories, partially offset by inventory investments to support frequency categories, and strategic investments to support long-term market-share opportunities.

The quarterly dividend was raised by 1.9% to $1.10, leaving the group on track to increase its annual payout for the 52nd consecutive year. The company did not repurchase any stock in the second quarter and currently has $9.7bn of remaining capacity under its repurchase programme.

Given recent sales trends, the company has lowered its guidance for the full year. It expects comparable sales in a wide range around a mid-single digit decline for the remainder of the year, and now expects full-year adjusted EPS of $7.00-$8.00, versus $7.75 to $8.75 previously.

Source: Bloomberg

Yesterday afternoon, InterContinental Hotels Group announced the launch of a new hotel brand as part of its ongoing growth strategy.

IHG owns a portfolio of 19 attractive brands across all price tiers (including Crowne Plaza, InterContinental, Holiday Inn, and Six Senses) and has a strong operating system, both of which drive customer loyalty and pricing power. The group operates a highly scalable, asset-light model, based on franchising and management contracts, with low capital intensity and high returns. The model also means the group doesn’t bear the operational costs of running a hotel. The company is focused on delivering industry-leading net rooms growth over the medium term. It currently has a 4% global market share and a 10% share of the new room pipeline.

Long-term growth is being driven by a rising global middle class with a desire to travel. In the business market, IHG’s weighting is towards essential travel and non-urban markets.

The company’s profit is derived from revenue generated from existing hotels, driven by the level of occupancy and the room rate charged. In addition, growth comes from new hotel rooms added to the system from existing brands, new brands, and acquisitions.

As a hotel property owner or someone looking to become an owner of a new hotel, life is made a lot easier if it is done with the support of a global operator like IHG which supplies the benefits global scale, technology platforms, a strong sales organisation, low-cost distribution systems, and the leading IHG One Rewards programme, supported by its proven success in developing, launching, and growing brands.

When IHG signs up a new hotel owner, it is much quicker to convert an existing hotel to an IHG brand than to build a new hotel from scratch. In the first half of 2023, conversions from other brands accounted for over a third of both openings and signings.

At the time of its half-year results last week, the company announced plans to launch a new conversion brand and this morning further detail has been provided.

The new brand, Garner, will target mid-scale conversion opportunities, and is designed for value-driven travellers. The brand will slot in alongside its upper midscale brands, Holiday Inn and Holiday Inn Express at a lower price point and conversion cost per key than Holiday Inn Express, and will complement IHG’s new-build midscale brand, avid hotels. It will target other smaller brands and independent hotels, of which there are c. 700k rooms across 9500 hotels.

The group has already received more than 100 definitive expressions of interest in Garner, which demonstrates the strong potential in a segment thought to be worth $14bn in the US market alone. The new brand will be ready to franchise initially in the US by early September, with the first hotels expected to open by the end of 2023. With a goal to expand globally, IHG expects the brand to reach an estate of over 500 hotels over the next 10 years and 1,000 hotels over the next 20 years in the US alone.

The group’s expansion programme sits alongside its capital allocation on share buybacks. The current $750m programme (c. 6% of market cap.) is expected to end no later than 29 December. At that point, gearing is still expected to be below target, potentially providing scope for additional returns.

Source: Bloomberg