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from Breakingviews:

Tesco should cut its dividend

By Robert Cole

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Shareholders ultimately lose out when too-high payouts prevent companies from responding well to problems. Right now, Tesco needs all the financial flexibility it can muster. Its current dividend is dangerously constricting.

In pure financial terms, the UK-based supermarket has the wherewithal to maintain the payment at current levels. The last 14.76 pence annual dividend was twice covered by underlying earnings per share, and the 1.2 billion pound payment was roughly the same as the free cashflow, HSBC calculates. If profit falls short, Tesco could cut capital expenditure – currently 2.5 billion pounds a year. And it could easily borrow more. Trading profit in 2014 was nearly eight times the interest bill.

But renewed commitment to the dividend would burden the company at a bad time. It needs to cut prices to fight off threats from discounters. Investments in infrastructure and logistics are required if Tesco is to maintain leadership in convenience stores and online shopping. There could also be writedowns on property values of out-of-town stores.

from Breakingviews:

Dollar store bid battle leaves value on the table

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Dollar store mergers, it turns out, don’t come cheap. Dollar General – call it General – on Monday joined the fight for rival U.S. discount retailer Family Dollar with a $9.7 billion cash offer. That topped an earlier agreed acquisition of Family by the smaller Dollar Tree, which as wags have noted could result in a combination called Family Tree. Even above General’s $78.50 a share bid, though, both of Family’s suitors have room to lob in a few more singles.

from Counterparties:

MORNING BID – Retail therapy

All that’s left for investors now when it comes to earnings season is the shouting, but if the rest of the retailers post results anything like Kate Spade did on Tuesday, the shouts will be screams of terror rather than anything that assuages investors over the state of the overall economy. Kate Spade’s executives went into some detail on its conference call as to the nature of its margins shortfall – which Belus Capital chief equity strategist and longtime retail analyst Brian Sozzi said are not likely to improve until the middle of 2015 – and the company then did itself no favors by declaring that it wouldn’t be discussing the margin issues any further on the call. (Craig Leavitt, the CEO, violated that rule to some degree, but basically, investors don’t like it when you tell them flat-out that you’re not going to talk about your problems, and when you’re a company with a forward price-to-earnings ratio of 77.5 and a price-to-book value of 119, that’s going to be particularly true.)

Other luxury retailers have noted their own problems with attracting customers at this time, including Michael Kors Holdings, which saw its own shares stumble of late after also warning of margin pressures due to expansion in Europe, but at least Kors has a forward P/E ratio around 19, which puts it in line with peers like Coach and Ralph Lauren.

from Breakingviews:

China’s e-commerce secret weapon: the delivery guy

By John Foley 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Want a Big Mac delivered to your door in minutes? Or a refrigerator by the end of the day? While U.S. retailers puzzle over how to make that happen, China’s e-commerce companies are already there. Servicing the country’s web-connected consumers at ever-faster speeds is driving some big businesses, not to mention stock market valuations. The secret weapon: the humble delivery guy.

from Breakingviews:

Discounters’ $20 bln deal may spark M&A price war

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Discount retailer Dollar Tree’s $8.5 billion pounce on rival Family Dollar could spark an M&A price war. The companies have identified more than enough cost savings in their $20 billion union to cover the 23 percent premium to be paid to Carl Icahn and other Family Dollar investors. As a percentage of revenue, though, synergies are relatively low. That may leave room for sector giant Dollar General to lob in a bid.

from Breakingviews:

Tesco’s new chief should think the unthinkable

By Robert Cole

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Tesco has a real chance at reinvention. Hiring Unilever lifer Dave Lewis to replace Phil Clarke as chief executive provides a golden opportunity for an outsider to apply radical thinking to solving the UK supermarket group’s mounting problems.

from Counterparties:

MORNING BID – Closet cases

Usually when retailers warn of earnings weakness - particularly if they're saying the entire economy is in a funk - there are two possible explanations:

1: They're right, and the real economy is truly suffering, or
2: It's all their own fault.

from Breakingviews:

Woolworths pays too-steep ransom in Aussie battle

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Woolworths is paying too steep a ransom in its retail battle. The South African group is buying billionaire Solomon Lew’s stake in an Australian unit in an attempt to secure the billionaire’s support in its A$2.1 billion ($2 billion) takeover of upmarket department store chain David Jones. The side deal raises the effective takeover premium – and piles pressure on Woolworths to realise synergies.

from Counterparties:

MORNING BID – The first step is a Lulu

It will be interesting to see if the spiral that yogawear retailer Lululemon Athletica has found itself in over the last year is one that can be arrested. Companies rise and fall often in this world, but the U.S. stock market’s history is littered with retailers that went into a tailspin after series of missteps that turn once-interesting investments into a veritable death trap for investors, and result in the kind of drop that benefits mostly short-sellers, late-night comedians and eventually restructuring lawyers.

It’s particularly rough for companies that inspire cult-like followings, be they as a stock or as a retail purchase, as markets eventually become saturated, competitors jump into the fray, and investors go forth and look for the next big thing to occupy their time. And a stock like Lululemon, which quintupled between late 2010 and early 2012, is kind of the definition of a cult stock. That’s well and good when earnings keep going, which kept the stock price in a range (albeit elevated) through December 2013, but those days are over.

from Breakingviews:

Reality yet to cut into ASOS valuation

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Reality has yet to cut into ASOS’s valuation. A profit warning on June 5 sent shares in the British online fashion retailer down nearly a third. But the company continues to totter on an uncomfortably high earnings multiple. That deserves to come down too.

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