If the CEOs of the UK’s consumer-focused companies are losing sleep these days, I’m not at all surprised. It’s all but given that the economy will slow down post-Brexit, though how much and for how long hinges on how the exit deal is framed.
Potentially weaker macros, in this case consumer spending, won’t affect all companies equally though. I think businesses like FTSE 100 retailer NEXT (LSE: NXT) are likely to face rougher conditions than FTSE 250 cinema chain Cineworld Group (LSE: CINE). Here’s why.
NEXT: Financial outlook cloudy
The retailer’s latest results don’t inspire much confidence. While sales have improved, net profits have declined. Its outlook for 2019 is muted too, with sales growth expected to slow down to 1.7% from 3.1% this year. I’m not sure that should be the case, in so far as the company itself is optimistic about real earnings increases, a key leading indicator of demand for its products. In its own words: “Real Earnings in the UK have remained positive since January 2018 and look like they are still gaining strength as we move into 2019.” This doesn’t add up for me.
Also, pre-tax profits are already down by 0.4% in 2018, and are expected to continue to take a hit next year as well. While this can be attributed to structural increases in costs as the company ramps up online operations, to my mind it’s just not a good mix when combined with lower sales growth expectations. It’s not a total write-off, to be sure, especially with its strong cash-flows and rapidly growing online sales. But there are better performing companies out there that I feel would be a more reliable place for you to invest.
Cineworld: US focus bodes well
This brings me to Cineworld. The company reported a strong 7.2% revenue growth rise and a 9.4% increase in earnings before interest, taxation, depreciation and amortisation (EBITDA) in 2018. Strong US markets have buoyed overall performance, which accounts for 75% of the total revenue share. Sales have increased in the UK and Ireland as well, and while this geography has dropped the ball on profits, it was more than made up by the US and the rest of the world.
Among the companies I have researched, those with big chunks of business from outside the UK have shown good financial health and I think will continue to do so in the future as well. Cases in point being Ireland-based-but-US-focused construction company CRH and packaging and paper products provider Mondi. With the US economy expected to remain strong in 2019, the outlook for US-based businesses should be good too. This includes Cineworld. There’s some concern about the 10x increase in its debt levels during the past year, due to its acquisition of US-based Regal Entertainment. But given its recent financial performance, I think the integration is going well.
With this as the background, even if it faces some rough weather on account of the massive Regal investment, I still think that it’s capable of riding out the tough times, making the shares a good buy. I am less sure that NEXT would be able to handle a demand dip as well as Cineworld.
