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Lockdown 3.0, ASX finishes 0.5% lower, Baby Bunting (ASX:BBN) riding COVID-19 boom

The ASX200 (ASX:XJO) finished 0.6% lower on Friday, dragging the market to 0.5% for the week.

The news of the day was the snap five-day lockdown in Victoria, which naturally sent the industrials sector to significant losses, Qantas (ASX:QAN) fell 4.8% and Webjet (ASX:WEB) 3.9%.

Over the week, it was the telecommunications sector that delivered, adding 2.2% with Telstra (ASX:TLS) surprising the market by retaining its dividend and Vocus (ASX:VOC) receiving a takeover offer.

The standout, however, remained the BNPL sector as Zip Co (ASX:Z1P) began catching up to Afterpay (ASX:APT) jumping 24.8% to a record high in just a few days.

Baby Bunting (ASX:BBN) was the report of note on Friday, announcing a 54.7% increase in profit to $7.5 million on the back of a 16.6% jump in sales in the half.

Management reiterated that they had not received any JobKeeper or rental assistance throughout the pandemic, they simply seem to be benefitting from the associated ‘baby boom’.

For the six weeks of 2021, sales are up a further 18.5% and the profit margin continues to improve on the back of a 95.9% increase in online sales. The dividend was increased by 41% but shares finished 6.6% lower.

US markets stronger, closed today, Walt Disney Corp (NYSE:DIS) delivers shock profits

All three US indices finished at record highs on Friday, the Nasdaq and S&P500 up 0.5% for the session, also finishing 1.7% and 1.2% higher for the week.

The positive momentum came from the approval of another round of US$1,400 stimulus cheques and half of President Biden’s plan, as well as confirmation that some 26 million vaccine doses had already been administered.

With discussion once again focusing on the valuation of US markets, the current reporting season has been considerably stronger than expected, with profit moving ahead of prior year levels, meaning corporate earnings may actually be catching up to their ‘inflated’ prices.

Walt Disney (NYSE:DIS) was the major report of the day, falling 1.7%, despite announcing an unexpected US$29 million profit.

The quarterly report once again proved that ‘content is king’ with management announcing Disney+ now had 95 million subscribers and the group had obtained 146 million in total across their various platforms.

The owners of brands ranging from Marvel to Star Wars and Pixar reported 100% growth in users which triggered a 73% increase in ‘Direct to Consumer’ revenue to US$3.5 billion.

This wasn’t enough to offset weakness in their parks and cruise division, falling 53% to US$3.58 billion and sending group revenue down 22%.

Despite the weakness, the company has proven to be one of the most successful at ‘pivoting’ during this time of crisis setting up their business for decades to come and rewarding shareholders in the process.

Three takeaways: Cost cutting takes precedent, board responsibility in focus, be willing to reassess 

My first takeaway this week isn’t a positive one for income starved investors, being that cost cutting has clearly taken precedent over dividends on the ASX.

Half-yearly reports this week were littered with comments about delivering ‘efficiencies’ and ‘transformation’ programs but were all clearly focused on one thing, maximising profits through lower costs.

Dividends outside of CBA and TLS have disappointed, with the likes of Boral (ASX:BLD), Challenger (ASX:CGF), and AMP (ASX:AMP) making no payout at all. This shouldn’t always be viewed as a negative though, as it means companies are reinvesting in themselves after years of failing to do so.

The debacle that has been Crown Ltd’s (ASX:CWN) Barangaroo casino license application in Sydney has redirected attention to the role of boards in large listed companies.

With the inquiry suggesting poor processes, weak governance and a general lack of oversight may have contributed to money laundering and other concerns, the board and CEO have naturally been in focus.

With ASX board members often holding positions at multiple companies, it seems difficult to impact much long-term change, but it must begin at the top and more responsibility needs to be taken.

Finally, the recent retraction of AMP and Link Administration’s (ASX:LNK) unexpected takeover offers an insight into the need to reset expectations when circumstances change.

We had held both on the view they were undervalued but advised clients to sell after learning of the takeover offers on the basis that they reflected today’s fair value; both have fallen significantly since.