24/7 Wall St. looked at major winners and loses at the effect of Brexit hits the U.K. and EU. VW and Gap (NYSE: GPS) have large sales and financial exposure. Walmart (NYSE: WMT) has almost none.
The case in favor of Walmart’s store distribution and the concentration of its stores in the U.S. and Mexico:
Of the 30 blue-chip stocks in the Dow Jones Industrial Average, only Wal-Mart Stores Inc. (NYSE: WMT) is showing a gain in Friday trading, up about 0.5% in the noon hour. Other blue-chippers are down anywhere from 5.8% (Goldman Sachs) to 0.3% (Verizon).
Wal-Mart owns U.K. low-price supermarket chain Asda with more than 500 stores in the country. It is safe to say that the performance of those stores has been disappointing at best and dismal at worst. Same-store sales tumbled 5.7% in the first quarter of this year, with store traffic down 5% and average ticket size down 0.7%. It was easily the worst performer in Wal-Mart’s international empire.
The good news for Asda came earlier this week with a report that Britons’ discretionary income was at its highest level since 2008, helped along by lower costs for food. The report, compiled by Asda and called the Asda Monthly Income Tracker, cited falling costs of essential items, a lower unemployment rate, and an increase to the country’s National Living Wage as the reason for the rise in discretionary income.
And given the sharp drop in the British pound following the Brexit vote, U.K. consumers are going to need all the spare cash they can get to pay for more expensive imported goods. That’s where Asda and competitors like Tesco come in — stretching those discretionary pounds further.
The case against Gap:
That The Gap Inc. (NYSE: GPS) is struggling is not exactly headline news. When the clothing retailer reported first-quarter last month, same-store sales were down 5% and total sales were down 6%. Last Thursday’s Brexit vote is only likely to make these numbers worse.
The company’s 183 Gap and Banana Republic stores in Europe account for 5% of corporate net sales, or $181 million. That’s about half the total from sales in Asia, where the company has 432 stores. Gap closed 2 of its European stores in the first quarter and opened 7 new stores in Asia.
The United Kingdom is home 137 Gap and Banana Republic stores, about 75% of all the company’s stores in Europe. The British pound took a beating early Friday, dropping to multi-decade lows at one point. A weaker pound, a stronger dollar, and the uncertainty surrounding trade among Britain, the rest of Europe, and other countries, including the United States, are not good news for Gap.
A link to all stores in the U.K. and EU
And, VW’s problems:
VW is by far the largest seller of cars in the EU. It has nearly 25% of the market. As the region’s economy will almost certainly slow, so will VW’s sales
The trouble for VW’s sales gets added to its diesel emission scandal, which its admits will cost it $18 billion. The scandal has also hurt VW’s reputation, and triggered investigations including one of its former CEO.
According to the European Automobile Manufacturers’ Association’s (ACEA):
In May 2016, the European passenger car market saw strong growth for the 33rd consecutive month. Registrations during the month grew by 16.0% compared to May 2015, reaching 1,288,220 units.
VW did not keep pace. It May unit sales were up 9.1% to 309,708. However, the was primarily due to an increase in Audi sales, up 21.1% to 73,009 and Skoda, up 15.3% to 56,483. Sales of the VW flagship brand were higher by only 4.1% to 143,303. The overall market share of VW fell to 24% in May from 25.5% last year. Rivals PSA Group, maker of Peugeot, rose 18.7% to 135,442, and sales of Renault Group rose 28.7% to 137,102.
Much like the U.S., car sales in the EU have surged for over 3 years. However, sales were deeply wounded during the recession. In the first quarter of 2009, they fell 17.2%
Brexit is expected to slaughter cars sales in the U.K. According to the FT’s motor industry correspondent Peter Campbell:
Demand for new cars in the UK may fall by a fifth if the country enters a recession, a City analyst has warned in the first reaction from the automotive industry to a likely Brexit vote.
Appetite for new cars falls by 20 per cent in a “typical” downturn, Stuart Pearson, an analyst at Exane BNP Paribas, wrote in an early morning note to clients
Many analysts believe that the economic effects of Brexit will be just as bad for the EU as the U.K. If so, VW, the largest car company in the region, will take a terrible beating
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