Morning Note: Market news and updates from BAT and fashion retailer Inditex.

Market News

US equities edged lower last night – S&P 500 (-0.3%); Nasdaq (-0.3%) – as traders await key inflation data for clues on whether the Federal Reserve will cut or hold interest rates next week. The dollar steadied after a three-day gain, while gold moved up to $2,690 an ounce. China may boost gold holdings in 2025 to aid the yuan, Goldman Says.

Alphabet rose by 5% after Google struck a partnership with renewable energy developer Intersect Power to provide gigawatts of power to new data centres. This follows the unveiling of a new generation chip that the company said helped overcome a key challenge in quantum computing. A federal judge blocked Kroger’s $24.6bn purchase of Albertsons, driving Kroger bonds higher.

In Asia this morning, equity market were fairly directionless as an annual economic meeting begins in Beijing, with leaders hinting at stronger stimulus amid the threat of a US trade war: Nikkei 225 (flat); Hang Seng (-0.7%); Shanghai Composite (+0.3%).

The FTSE 100 is currently trading 0.3% lower at 8,222. Sterling closed at its strongest level against the euro in more than eight years – €1.2130. The pound currently buys $1.2757. Gilt yields rose to 4.31%, the highest since 28 November on the view that the Bank of England will cut rates less aggressively than the ECB.

Brent Crude moved up to $72.40 a barrel on the back of continued China optimism and reports the US is weighing harsher oil sanctions against Russia.

Source: Bloomberg

Company News

British American Tobacco (BAT) has this morning released a trading update which highlights performance is in line with management expectations, leaving the group on track to deliver its full-year guidance. In response, the shares are little changed in early trading.

BAT is a global tobacco company with more than 200 brands. The group has a Strategic Portfolio of priority brands made up of combustible tobacco products (including Dunhill, Kent, Lucky Strike, Pall Mall, Rothmans, Newport, and Camel) and New Categories (including vapour, tobacco heated products (THP), and modern oral, with brands including Vype, glo, and Vuse). BAT also owns a portfolio of other international and local cigarette brands.

The group’s aim is to progressively improve its performance to deliver 3%-5% revenue growth and mid-single digit adjusted profit from operations growth on an organic basis at constant currency by 2026. Further out, the group has also committed to ‘Building a Smokeless World’, with 50% of revenue derived from non-combustibles by 2035.

This morning, BAT has confirmed its full-year 2024 guidance for low-single digit revenue and adjusted profit from operations growth on an organic, constant currency basis. This is at a time when the global tobacco industry volume is expected to be down by around 2%.

As previously highlighted, the second-half performance acceleration has been driven wholesaler inventory movements related to continued investment in its US commercial actions, as well as the phasing of new launches. The company expects to deliver improved New Category and Combustibles revenue growth in H2 versus H1.

In Combustibles, US commercial actions are continuing to gain traction despite a challenging macro-economic backdrop. US industry volume is down 9% YTD. The group is enjoying continued volume and value share gains in the AME and APMEA regions. Overall, group cigarette volume share in key markets is up 20 basis points, while value share is down 20 basis points due to adverse geographical mix and the implementation of commercial plans in the US.

In New Categories, strengthening innovation is driving momentum. In the vaping category, Vuse is enjoying continued global value share leadership at 40.3% in key markets. After a period of disappointment, glo has started to deliver sequential heated tobacco category volume share improvement in key markets. In modern oral, Velo has generated strong revenue and profit growth, with continued leadership outside the US.

Overall, BAT remains highly cash generative and expects to deliver operating cash flow conversion in excess of 90% again in 2024 and be at the high end of its target leverage range of 2.0x-2.5x net debt/EBITDA by the year-end.

The company will continue to reward shareholders through strong cash returns, including a progressive dividend. In March, the group completed the monetisation of a 3.5% portion of its ITC stake, enabling the initiation of a sustainable share buyback programme, starting with £700m in 2024 and £900m in 2025.

In March 2019, Imperial Tobacco Canada Limited (ITCAN), a subsidiary of BAT, obtained creditor protection under the Canadian Companies’ Creditors Arrangement Act (CCAA). Under a confidential court supervised mediation process ITCAN has since been negotiating a possible settlement of all of its outstanding tobacco litigation in Canada while continuing to run ITCAN’s business in the normal course. In October 2024, the court-appointed mediator’s and monitor’s plan of compromise and arrangement was filed in the Ontario Superior Court of Justice. The company supports the proposed settlement and expects to have more clarity on the financial impact by the time of its full-year results in February 2025.

Source: Bloomberg

Inditex has today released results for the first nine months of its financial year that were below market expectations. However, current trading remains robust and guidance for the full year has been confirmed. In response, the shares have been marked down 6% in early trading.

Inditex is the world’s leading apparel retailer, with annual sales of almost €36bn. Through brands such as Zara, Pull & Bear, and Massimo Dutti, the group has around 5,659 managed and franchised stores and a strong online presence.

The company’s strategy based on fast fashion at attractive prices has met with headwinds on environmental grounds and, in response, the group is transforming towards a fully integrated, digital, and sustainable business model. With a low share of a highly fragmented market, the company sees strong growth opportunities, with sales productivity in its stores increasing. The group is undertaking an ongoing store optimisation plan – so far in 2024, there have been openings in 45 markets.

In the nine months to 31 October 2024, sales grew by 10.5% in constant currency to €27.4bn, with growth in all concepts. Gross profit increased by 7.2% to €16.3bn and the gross margin rose by 4 basis points to 59.4%. The group has continued to ‘rigorously’ manage its operating expenses, which grew by 7.0%, below the rate of sales growth. EBIT increased 9.3% to €5.67bn, slightly lower than the market forecast of €5.80bn

Due to the strong operating performance, inventory was 2.6% lower at 31 October 2024 than last year. Free cash flow generation remains strong and the group ended the period with net cash of €11.8bn, up 3%. The dividend of 77c was paid in November, made up of a 27c ordinary dividend and 50c bonus payment.

The company has continued to trade well in the current quarter – between 1 November and 9 December, store and online sales rose by 9% year on year and Autumn/Winter collections “well received” by customers.

The growth of annual gross space in the period 2024-2026 is still expected to be around 5%. The group expects a stable gross margin this year (+/- 50 basis points).

Source: Bloomberg