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Chair Archie Norman says making clothing more appealing and closing unprofitable stores is paying off

One of the main architects of Marks and Spencer’s turnaround has credited efforts to break the “vicious circle” of sticking with ageing customers for helping revive the UK high street stalwart’s fortunes.

Chair Archie Norman told the Financial Times that the department store and grocery chain had previously focused too much on its older clientele and not enough on shoppers of all ages who want to look stylish.

“Because the customer base is ageing, we thought we should aim for ageing customers. The M&S core customer was seen as someone who no longer wanted to look stylish,” he said of the time when he was appointed in 2017. Now, the retailer understood that “you’d probably quite like to look like you did when you were 35 or 40”.

Gone from most stores are acres of drab clothes with confusing layouts. Instead, M&S has brought in upmarket fashionable brands such as Jaeger, which it bought out of administration in 2021, and begun selling others including Hobbs and Sweaty Betty on its website. Celebrities including Sienna Miller have been enlisted to front its fashion campaigns and it has embraced advertising on Instagram and TikTok.

For investors, the group is also back in fashion. The 139-year-old company, which has been promising shareholders and customers a revival for two decades, returned to the FTSE 100 after a four-year absence this year and announced this week that it would pay a dividend for the first time since before the pandemic.

M&S shares have more than doubled in the past 12 months, including the 9 per cent boost they received on Wednesday when the group reported a surge in first-half pre-tax profit, which jumped 56.2 per cent to £326mn.

Shareholders and analysts said that the retailer had turned a corner under Norman’s leadership.

Ian Lance, a fund manager at M&S shareholder Temple Bar Investment Trust, said the latest results “demonstrate that the strategy to reshape M&S is starting to deliver”.

“Phase one of this turnaround was about fixing the obvious strategic deficiencies within the business,” he said. “It feels like we are now moving on to phase two which is where the competitive advantage of the reshaped business starts to deliver real growth.”

But several cautioned that it still has a lot of market share to gain in food and clothing as well as remaining legacy systems to fix.

“Still in the M&S supply chain you have too many suppliers and a lack of smoothness from product leaving the factory through to reaching the store, so lots to do on that front,” said Clive Black at Shore Capital, adding that some stores still needed to be closed and others modernised.

Norman, a restructuring specialist and former MP, said his arrival followed “25 years of drift” at M&S, where the company had become notoriously slow moving.

M&S is now less sentimental about closing stores, having shut 86 outlets since 2017. The group has 244 full department stores selling clothes, food and homeware, with another 319 M&S-owned food stores and 461 franchise food stores.

Norman said there were more closures to come, with M&S saying this week that just over 90 stores are expected to go.

The 69-year-old acknowledged that the group had work to do on simplifying its supply chain, saying that it was “30 per cent of the way through” the work he wants to do.

A relatively new leadership team is also still becoming settled, he said. Former chief executive Steve Rowe stepped down last year and was succeeded by Stuart Machin, who oversaw the group’s food business. “Of our leadership team, 70 per cent of the top 15 [people], but also 70 per cent of the top 200 are now new to the business,” Norman said.

M&S has benefited from the collapse of several key high-street competitors in recent years — department store Debenhams and retail group Arcadia, which owned the Topshop, Burton, Evans and Wallis brands.

“I don’t expect a lot more capacity withdrawal, but you’re not seeing capacity increase either,” Norman said.

Store closures and a pullback from its international ambitions have freed up investment for its digital operation.

Online clothing sales have improved. “Our share of our sales online has gone from 17 per cent to around 30 per cent. We think that probably needs to go to 45,” he added. “We’ve not got open road but there’s a lot of space ahead.”

“There is lots of room for them to gain market share in clothing, and in food,” said Black at Shore Capital.

One key battleground is food. M&S’s latest profits were boosted by the performance of its upmarket grocery and food-to-go stores, which compete with the likes of Waitrose, and it has ambitions to increase its market share further.

Norman remains bullish on the prospects for Ocado Retail, the online supermarket it jointly owns. Although the partnership with Ocado is yet to be profitable — suffering a first-half operating loss of £23.4mn — M&S believes it will move into the black, albeit it in three years.

“Ocado, whatever you think of it, is going to grow,” he said.

The country’s attractiveness as a destination for private capital is at an all-time low, an investor association warns

Bill payers rightly throw their hands up when vital infrastructure fails. So it proved this week when 13,000 people south of London did not have running water. 

A Thames Water treatment works was hit by storms. The incident unleashed a gush of concern about infrastructure upgrades to improve climate resilience and support economic growth. And, crucially, who will stump up the cash. 

It is not just water. Money also needs to be pumped into energy, waste management, broadband networks and transport, according to the National Infrastructure Commission. To meet net zero emissions and improve productivity, investment in infrastructure will need to rise from an average of £55bn a year in the past decade to £70bn-£80bn per annum in the 2030s. Two-thirds will have to come from private investors, who recover costs via bills. Government investment will be largely focused on transport.

Once built, new infrastructure should lead to lower costs. Take energy. Gas-fired power stations have higher operating costs than wind farms. By 2055, household spending on infrastructure services should drop from today’s £7,300 to between £5,100 to £6,100 in 2022 prices, says the NIC. That is despite a sustained rise in water bills.

But Britain is out of favour with infrastructure investors. Its attractiveness as a destination for private capital is at an all-time low, warns the Global Infrastructure Investor Association, whose members include Brookfield and Macquarie.

Generous subsidies in the US and the EU do not help comparisons. Yet some wounds are self-inflicted, such as a recent bungled offshore wind auction.

Tackling long-running gripes such as planning delays would help woo back frustrated investors. In future there will be a lot more at risk than several thousand people temporarily without water.

Organized labor has surged back into the U.S. conversation, with (mostly) successful strikes by the United Auto Workers and Hollywood writers and actors. Europe, the motherland of labor unrest, has gone quiet.

That isn’t how 2023 started. In February, United Kingdom strike activity hit a post–Margaret Thatcher peak. Germany shut down for a one-day “megastrike” in March. Transportation unions wreaked havoc across the continent as the summer travel season approached.

Autumn has brought eerie calm instead. “The storm has passed for now,” says Nina Skero, CEO of U.K.-based consultant Cebr.

One reason is that the winter-spring labor actions worked. German postal workers scored an average 11.5% pay increase in March. U.K. teachers settled for 6.5% in July. The union successes have rippled across economies. U.K. wage hikes are running at 7% to 8%, reports Hannah Slaughter, senior economist at the Resolution Foundation in London.

Governments have also taken direct action to cushion citizens from inflation. Germany spent 2% of gross domestic product subsidizing energy costs in 2022, and France and Italy, 1% each, the European Commission estimated. The U.K. has raised its minimum wage by 45% since 2016 to 10.42 pounds sterling ($12.81) per hour.

Europe’s macroeconomic weather meanwhile has also changed sharply. Inflation, a major driver for all the strikes, has fallen to 3% in the euro area from 10% a year ago. The U.K. rate has dropped from 11% to less than 7%.

Attention has shifted to the prospect of recession, which should grip most of Europe by early next year, says Eoin Drea, senior researcher at the Wilfried Martens Centre for European Studies. “Both employers and the unions are worried about what the winter will bring,” he says. “That has dampened expectations.”

Especially damp is Germany, home to Europe’s premier private-sector union, 2.2-million-strong IG Metall. GDP there has shrunk in three of the past six quarters. The heavy industry where IG Metall might flex its muscle has been rocked by the cutoff of cheap Russian natural gas and threatened by emerging Chinese supremacy in electric vehicles.

Christiane Benner, who made history by becoming the mega-union’s first female boss last month, has started out playing defense. Rather than stick it to the bosses, she’s lobbying government to halt the “creeping dismantling of industry and jobs.”

Restive French unions focused their energy and political capital this year on street protests against President Emmanuel Macron’s plan to raise the pension age. Macron forced through the reform unilaterally. The demonstrations subsided with little carry-over into industrial action. Strike-prone Italy has also gone quiet. “France and Italy have been quite stable from a labor market point of view,” Drea says.

Creeping dismantling might describe the long-term picture for European organized labor. This year’s strikes were concentrated in the public sector. Private-sector unions struggle against the same headwinds as U.S. counterparts: outsourcing, gig work, and declining membership, says Kurt Vandaele, senior researcher at the European Trade Union Institute. “With the increase of temporary contracts and far less political support, it’s not a very optimistic picture,” he says.

IG Metall’s Benner is nonetheless warning one new German employer that her union isn’t dead yet. That would be Elon Musk and Tesla (ticker: TSLA), which is revving up production at its gigafactory outside Berlin. “You need to be careful,” she told the headstrong billionaire in a Bloomberg interview. “The rules of the game are different here.”

Musk didn’t answer, but he did give his German workers a 4% raise.

Stocks related to wind, solar and other forms of renewable energy have fallen by a third this year. Only a handful may be ready to rebound.

Clean-energy stocks are suffering through their worst slump in years, causing the industry’s value to tumble by tens of billions of dollars and endangering America’s environmental goals.

Major auto manufacturers like General Motors and Ford Motor (F) have delayed plans to roll out electric vehicles. Offshore wind developers are canceling or delaying projects that were expected to provide millions of Americans with carbon-free electricity. Homeowners, even in climate-conscious states like California, are buying fewer solar panels for their roofs. And green-power producers known for offering steady, reliable dividends have lost their veneer of safety. Rising interest rates have posed the gravest challenge to the industry, but supply-chain problems, inadequate electric transmission infrastructure, and competition from China are hurting, too.

The fallout has caused 76 of the 77 stocks in the Invesco WilderHill Clean Energy exchange-traded fund (PBW)—a green-power benchmark—to fall for the past three months (the one stock to rise is a tiny fuse maker). The ETF itself is down 32% since the start of the year, compared with a 14% gain for the S&P 500

Most of those stocks look set to keep dropping. Solar and wind companies are awash in mispriced inventory and face an extended stretch of high interest rates; they’re probably several quarters away from a financial rebound. Newer tech like clean hydrogen is years away from profitability. While some clean-energy stocks do seem headed for a rebound, even those call for some caution.

Beyond the financial fallout, the setbacks in green energy have broad implications for the environment, particularly after the hottest summer on record. A consortium of scientists known as the Climate Action Tracker says the country is off track to meet its 2030 goal to roughly cut emissions in half from 2005 levels, and won’t get there “without additional, drastic emission reductions measures.” That will require all of the force that the clean-energy industry can muster.

There are political implications, too. America’s energy transition, a key pillar of President Joe Biden’s agenda, is under threat. Biden wants America to produce all of its electricity without emitting carbon by 2035, a goal that depends on lightning-fast installation of new energy infrastructure. Last year’s Inflation Reduction Act earmarked at least $369 billion for clean energy. To make the government’s investment pay off, companies will need to spend trillions more. Biden can ill-afford delays.

Serious as they are, the industry’s setbacks are not about to halt the energy transition. They look more like a detour than a derailment. Unlike in past eras, the shift to renewable energy now has powerful momentum. Just about every electricity producer and seller in America is on its way to going green, albeit at different speeds, and they often face penalties if they backtrack. Tech advancements have made renewables cost-competitive with fossil fuel plants in many states, even without government help. And industrial-size batteries are solving a longstanding problem for renewables: They are keeping the lights on even when the sun isn’t shining and the wind isn’t blowing.

There’s another big force supporting the transition: private money. Even as the stocks crater, private investments are cascading into the industry. Outside of electric vehicles, in fact, the majority of investment in clean energy is happening in private markets. From August 2022 to August 2023, private-equity firms had invested $108 billion in new renewable energy and energy storage projects in the U.S.—more than all of the publicly traded North American utilities and independent power producers combined, according to S&P Global Commodity Insights.

The transition is “the first major industrial and technology investment cycle that occurs primarily in opaque private markets,” says Peter Gardett, the executive director of climate and clean-tech research at S&P Global Commodity Insights.

Private-equity investors commit to long holding periods, and are less likely to react to day-to-day price gyrations. Copenhagen Infrastructure Partners, one of the world’s largest private clean-energy fund managers, is on track to raise 12 billion euros ($12.9 billion) for its newest fund by next year, despite the fact that a third of the fund will be invested in the most-troubled area in renewables—offshore wind. “That money is committed with us for many, many years, not just quarter to quarter,” says Tim Evans, a partner at the fund manager.

For investors who don’t have the institutional backing or personal wealth to buy into private funds, there are slim pickings in publicly traded stocks—but they do exist. The ones closest to rebounding look to be large producers of clean power. Thanks to long-term contracts that have remained intact, utility-scale producers like AES (AES) and NextEra (NEE) could eventually lead the sector out of its morass.

To understand what could go right in clean-energy stocks, it’s important to see what has gone wrong. The list is not short. It starts with high interest rates. Solar and wind projects, and new electric-vehicle plants, demand heavy upfront investments that should pay off over decades. With the cost of corporate debt doubling in the past two years, from 3.2% to 6.4% for Baa-rated bonds, it’s a bad time to be taking out new loans to finance capital projects. “It was an industry whose economics rested on low rates,” says Bobby Tudor, CEO of Houston-based Artemis Energy Partners, which invests in traditional and clean-energy companies. “When you have your cost of debt effectively doubling, it sort of wipes out your equity return.”

For companies that sell rooftop solar systems, high rates have complicated the sales pitch. Homeowners are less inclined to finance big home projects when interest costs rise. The Inflation Reduction Act gave homeowners a tax credit worth 30% of the value of their solar system, but even that credit can’t overcome customer doubts when rates are high. In states like Texas and Arizona, where retail electricity rates are low, solar has become a much harder sell, say installers and equipment-makers.

And in California—the No. 1 state for solar—new rules that reduce the rates that utilities pay to solar customers that generate excess power have curbed demand for panels. Residential solar developers like Sunrun (RUN), Sunnova Energy International (NOVA), and SunPower (SPWR) have been hit hard by these dynamics. Sunrun reduced its growth outlook this month due to the “difficult conditions in the sector.”

Residential solar companies face another headache in Europe, where the war in Ukraine has made fossil fuels more expensive and caused a surge in rooftop solar adoption. That uptick in demand is slowing now, just as China has flooded the European market with cheap solar panels that destabilized the market. The industry’s middlemen, known as distributors, are awash in inventory just as demand has slackened.

The result is a paralyzed supply chain that has sunk the stocks of solar-equipment makers like Enphase Energy (ENPH) and SolarEdge Technologies (SEDG), which had been some of the best clean-energy performers for years. Enphase has projected that fourth-quarter sales would fall 40% below analysts’ expectations, and warned that the malaise will stretch into 2024. “In the short term, it is going to be a stressful time,” Enphase CEO Badri Kothandaraman tells Barron’s.

The utility-scale solar market—the panels that are spread across fields that transmit electricity to power plants—is in somewhat better shape. Utilities are rate-sensitive, but they can pass rising costs on to consumers. And power producers are installing solar modules at a rapid rate today, with the U.S. on track to roughly double its utility-scale solar installations this year from last year’s level, according to energy consultancy Wood Mackenzie.

Solar manufacturer First Solar (FSLR) is the most prominent company in the utility-scale industry, and it has been the biggest beneficiary of Biden’s clean-energy bill. The company has secured orders for the next several years. But it’s still vulnerable to Chinese competition, depending on tariff decisions starting next year. The stock fell 25% in the past three months and may waver until tariff policy becomes more clear.

Onshore wind power, the largest source of renewable electricity in the U.S., is in even worse straits. Turbines dot the landscape throughout the Midwest and in states like Texas. But uneven tax subsidies, slow transmissions approvals, inflation, and other problems have kept installations below their 2020 peak for the past two years. It isn’t clear when the industry will get back on track, even with the more-reliable subsidies in the clean-energy law.

Offshore wind is in perhaps the worst position of all. That industry is just getting started in the U.S., with turbines now going up near Martha’s Vineyard, Mass., set to provide the country’s first commercial-scale power. The Biden administration has much higher hopes. Biden has touted offshore wind as a key technology to decarbonize the electrical grids in several high-population coastal states like New York and Massachusetts, announcing a goal of installing 30 gigawatts of offshore wind power by 2030—enough to power 10 million homes. But several projects have already been delayed or canceled due to increasing costs, including a recent decision by offshore wind market leader Orsted (DNNGY) to walk away from two projects in New Jersey that were expected to provide enough power for about a million homes.

S&P Global Commodity Insights just slashed its 2030 offshore wind projection to 12 gigawatts from 22 gigawatts last year. A senior Biden administration official said in a phone call that the industry is dealing with a “macro environment that presents headwinds,” but said that Biden still expects to hit the 30 gigawatt goal by 2030.

Among the few stocks that seem able to withstand these forces are large utilities that have been betting on renewables for years and have the capital to buttress results during difficult moments. NextEra, whose business is split into a regulated Florida utility and a more freewheeling renewable-energy arm, is a case in point. The utility, which still generates most of its electricity with fossil fuels, has seen steady returns. Investors have been less sure about the clean-energy arm, which is the largest renewable developer in the U.S.

An affiliated company that buys some of NextEra’s renewable projects warned investors in September that high interest rates were hurting its growth prospects, sending NextEra stock down. But NextEra management said on its latest earnings call that it has plenty of capital to fund its growth plans, including by selling tax credits through a new program authorized by the Inflation Reduction Act. Illustrating its resiliency, NextEra reported record bookings in its latest quarter and kept its earnings guidance through 2026.

NextEra’s business selling power through long-term contracts insulates it from most near-term pressures. Analysts have lifted their projections for NextEra’s 2024 earnings, even as they’ve been cutting them for other green names. NextEra nonetheless trades in line with the market today on a price/earnings basis, after historically trading at a 50% premium. The current stock price “offers a significantly attractive entry point,” writes Morgan Stanley analyst Dave Arcaro. He thinks that shares could rise to $79 from a recent $59.

Then there is AES, a Virginia utility that also builds large renewable-power projects across the country. Its stock has fallen 42% this year, but its growth trajectory remains intact. Analysts have reduced their 2024 earnings estimates by only 2% this year, and the company just reaffirmed its 7% to 9% earnings growth guidance through 2025. AES has made inroads in states with aggressive climate policies like New York, where it is the largest owner-operator of renewable assets and just won 1.2 gigawatts worth of new contracts last month. Arcaro thinks the stock could rise to $26 from a recent $16.

It will not take a magic trick for clean-energy stocks to rise again. Some combination of falling interest rates and better supply chains could go a long way. If those factors come together in 2024, clean energy once again could be riding high.

Diageo warns of hit to profits from slowdown in Latin America and Caribbean

Shares tumble 15% after drinks group says growth will slow in first half on back of worsening sales slump

Drinks group Diageo has warned that growth in operating profits will slow in the six months to the end of December on the back of a deepening sales slump in Scotch whisky in Latin America and the Caribbean, sending its shares down 15 per cent.

In an unscheduled trading update on Friday, the maker of Johnnie Walker, Tanqueray and Guinness said it expected sales in Latin America and the Caribbean to fall 20 per cent in the group’s first half, squeezing profits.

As a result, Diageo predicts “organic operating profit growth for the first half of fiscal 24 to decline compared to the first half of fiscal 23”. The share price drop left Diageo the biggest faller on the blue-chip FTSE 100 index on Friday.

“Macroeconomic pressures have worsened and that caused lower consumption and really more consumer downtrading than what the team was expecting,” said chief executive Debra Crew, addressing the slump in Latin America, where Diageo’s business is primarily in Scotch whisky.

Diageo’s largest markets in the region are Brazil and Mexico, followed by Central American and Caribbean countries. In total the region accounts for roughly 11 per cent of the value of the group’s sales, the majority of which are driven by its Scotch brands Johnnie Walker Black Label, Johnnie Walker Red Label and Old Parr.

Both the Brazilian and Mexican economies are showing better than expected growth but anecdotal evidence suggests that whisky is going out of fashion for those who can afford it, with younger drinkers favouring top-end vodka or newer offerings such as craft gin. 

Eric Franco, a 35 year old museum worker in Mexico City, said whisky was appearing less frequently at parties. “I feel like it’s for slightly older people,” he said, saying he and his friends preferred beer, tequila and mezcal.

On Rio de Janeiro’s Copacabana beach, bartender Luan da Silva Cruz said Jack Daniels — owned by US group Brown-Forman — and Johnnie Walker Black Label tend to sell well. But he added that there is little demand for other brands and “among cocktails, the most popular by far is [national drink] caipirinha.”

At its last trading update in August, Diageo reported higher than expected inventory levels in Latin America and sales growth of 20 per cent in the first six months of 2023.

Crew said that because of the dampened economic environment, it had taken longer than expected to clear excess stock that was ordered when consumer demand was higher, adding that some wholesalers and retailers “may have purchased ahead of anticipated consumption” before interest rates started rising.

“With the volatility that we saw through the Covid supercycle, it’s been hard to see through what part of this was true consumption growth versus inventory increases,” she said.

Drinks groups prospered during the pandemic as consumers bought higher-end alcohol to make their own drinks at home during lockdowns. The party continued when countries reopened, but slowing sales at major drinks groups, particularly in North America, indicate that the boom is over.

Rivals including Pernod Ricard, Campari and LVMH’s wine and spirits division have all recently reported declining sales in the past quarter as consumers pushed back against price rises by trading down to cheaper brands or drinking less. Rémy Cointreau and Pernod Ricard’s shares each fell more than 4 per cent on Friday.

The gloomier outlook comes less than two months after Diageo told investors that operating profit growth would accelerate in the first half of its current financial year.

Speaking to journalists following the update on Friday, Crew, who started in the role in June, said the group expected an improvement in sales and profit growth in the second half of next year.

However RBC Capital Markets analysts James Edward Jones and Emma Letheren said: “If this is a temporary . . . then why did Diageo feel the need to up multiyear investment behind its global business? Our concern is that Diageo is facing a widespread retrenchment in premium spirits consumption caused by macroeconomic pressures around the world with an unknown end date.”

MILAN, Nov 10 (Reuters) - Several investment banks have approached Italy's Treasury with offers to help it sell part of its stake in Eni ENI.MI, saying the group's current share buyback will allow Rome to reduce its holding without losing full control, sources said on Friday.

Italy aims to raise some 20 billion euros ($21.34 billion) from asset disposals through 2026 to slightly reduce the euro zone's second-largest debt pile as a proportion of gross domestic product.

Bankers have told the Treasury in recent weeks it should take advantage of Eni's stated plan to buy back and cancel 275 million of its shares to reduce its stake, three sources familiar with the matter said.

The option however is not top of the list for the Treasury, one of the sources added.

Italy currently owns around 32.4% stake in the energy group, chiefly through the 27.7% it holds indirectly via state lender Cassa Depositi e Prestiti (CDP) as the Treasury has a small direct 4.7% stake.

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