HSBC: A mixed send-off for Gulliver’s travels

Overall you have to call this a strong performance from HSBC but falling short of fairly lofty expectations means the stock has fallen about 4% in early trading. Higher costs, no fresh buyback and a miss on profits has investors turning a little cold but shares remain up ~80% since April 2016.

Adjusted revenues were up 5% to $41.5bn, the first annual rise in six years but short of estimates. Pre-tax profits were short of forecasts too, coming at $2.3bn in Q4 and just a shade under $21bn for the full-year, up 11% on last year. Not as firm as anticipated but clear signs the bank is beyond recovery phase now as Stuart Gulliver heads off on his travels.

Common equity tier 1 ratio jumped to 14.5% from 13.6% a year ago, although this was down from the 14.7% reported at the time of the interim results in July, reflecting the $2bn buyback announced then. Dividends flat at $0.51, which is in line with forecasts. Investors may have hoped for a little more largesse given the much higher CET1 year-on-year but it looks like the last round is it for the time being. And whilst return on equity was significantly higher at 5.9% from 0.8% a year ago, there remains a long way to go before it comes close to the bank’s target of 10%.

There may be a bit of concern around costs that is impacting shares - adjusted operating expenses were 4% higher due to higher pay and investments in growth, up from the 3% reported six months ago. Nevertheless this appears to be the result of revenue growth and positive jaws of 1% suggest this doesn’t look like much to worry about.

Savings look good and this was a key part of Gulliver’s restructuring. The bank has achieved annualised run-rate savings of $6.1bn, up from the $4.7bn reported in the interim results in July. It has also beaten its target of offloading risk weighted assets, with a total of $338bn reported since 2015, an increase of $42bn from the interim results report.

Elsewhere, of interest as ever is the section entitled ‘Legal proceedings and regulatory matters’. A full six pages of the results release were dedicated to updates on litigation and legal proceedings, an overhang from past misdeeds that the bank is yet to entirely draw a line under. Specific litigation costs vary and may be higher than provided for but the worst of this looks to be discounted by the market already.

Dunlem shares slump on squeezed margins

Dunelm shares slumped 13% on the open as it becomes increasingly clear that margins are taking a battering as it seeks to maintain sales growth and market share. It’s proving to be a very tough market out there –we’ve seen several retailers in the sector fail in recent months and margins are coming under pressure across the board. Consumer spending is softer of course, but the decline in property market activity is key – the less people move home the less they spend on new furnishings.

In the first half, as was pretty well flagged in the last two updates, revenues grew well but margins are taking a beating thanks to the inclusion of sales from the lower margin Worldstores as well some heavy discounting.

Sales growth is strong: +6% like-for-like (LFL) including store LFL sales growth of 3.5%, and 18.4% total growth. Unlike some notable peers, online is doing very well, with 36.8% LFL sales growth on

EBITDA was down 2%, reflecting the consolidation of Worldstore losses. Profit before tax (pre-exceptional items) was down 8% to £60m, but after one-offs was 0.7% higher at £56.3m.

Margins are the real worry. Not only is the Worldstores acquisition dragging down the group average, but it was also due to a higher proportion of end of season and seasonal products. The concern is that Dunelm is heavily discounting to maintain market share, generating good headline LFL sales growth at the expense of profit.

Group gross margin declined 180bps to 48.6%. The lower margin Worldstores sales reduced gross margin by 80bps, while discounting lowered gross margin by 100bps. Operating costs were more than 22% higher, reflective of store investment and the timing of the Worldstores acquisition.

But margin pressure has been pretty well flagged and management remains confident of stabilising this in the second half. In addition, Dunelm expects lower costs and synergies from the acquisition of Worldstores to deliver good full year profit growth.

Free cash remains strong - net cash from operating activities rose 12.8% to £59.8m, while free cash flow was up 46% to £27.8m. This allows for an interim dividend increase of 7.7% to 7p per share.

Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and ETX Capital accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.