FTSE preview: Consumer confidence set to be revealed

May 4 2008

A trading update from Next and half-year results from easyJet should give an indication of consumer confidence this week.

Fashion chain Next’s first-quarter trading update on Thursday is set to make grim reading amid the toughest retail conditions in years.

At annual results in March, the group predicted like-for-like sales declines of between 4% and 7% across its high street stores in the first half of the year.

Next fears its main customers - aged between 25 and 45 - are likely to be hit heaviest by higher costs and debt burdens as the credit squeeze makes itself felt on the high street.

The poor weather seen so far in March and April also makes for a tough comparison with last year’s early heatwave which drew out the shoppers.

JP Morgan analyst Richard Chamberlain said the retailer was up against a “perfect storm”, predicting first half sales at the bottom end of the guided range.

He said: “Last year Next benefited from unseasonably warm weather in March and over Easter, whereas this year the weather has been colder and Easter much earlier.

“The colder weather may have boosted some of Next’s home ranges, but will have impacted sales of Spring/Summer clothing.”

But Next was struggling with high street sales declines before the credit crunch hit home and spent last year revitalising its stores and ranges and moving up-market in an attempt to “put the magic back” into the brand.

Despite the company’s sound financial position, Mr Chamberlain added: “We believe that the company needs to convince the market that it has the potential to generate same store sales growth in a more benign consumer environment.”

Next’s online and catalogue Directory has been a key sales driver in recent years as the high street stores struggle. The company predicts sales growth of between 0% and 2% in the first half for the division.

The potential impact of soaring fuel costs will dominate budget airline easyJet’s interim results on Wednesday.

The Luton-based carrier has already braced investors for lower profits in the second half of the year by warning of a potential £45 million hike in fuel costs in March.

With oil prices remaining well above 100 US dollars a barrel since that update - and surging to records near 120 dollars - analysts are fearful of what lies in store for the group. All eyes will be on the firm’s guidance on outlook and fuel costs next week.

Numis Securities’ Richard Carter said: “We expect easyJet to be positive with regard to the near term revenue environment and supply fundamentals are encouraging.

“Fuel, though, is another story and we are cutting our 2008 and 2009 forecasts to reflect oil price concerns.”

In the current consumer spending squeeze, passing on the higher costs to customers could be difficult. Mr Carter predicts full-year profits could slip to £156.7 million this year, compared to £191.9 million in the 12 months to September.

The results for the six months to March 31 are expected to show underlying pre-tax losses widening to between £40 million and £45 million from £17.1 million last year, Numis predicts.

EasyJet bought former British Airways subsidiary GB Airways for £103 million last year but the Gatwick-based carrier is also expected to have shown a loss.

Continued progress for entertainment retailer HMV is expected to be unveiled on Friday in a pre-close trading update.

The group, which owns the eponymous high street chain as well as bookseller Waterstones, was a stand out performer over Christmas, notching up a 9.4% like-for-like sales jump for the five weeks to January 5.

Performance at its core HMV stores was even better, soaring by 14%.

Bumper sales of games, consoles and million-selling DVDs such as Simpsons The Movie and the Bourne Ultimatum helped boost turnover to record levels.

HMV chief executive Simon Fox said the group, which operates around 700 stores in the UK and Ireland, had enjoyed its “best Christmas ever”.

The group launched a turnaround plan last year after profits tumbled amid competition from music downloads and supermarkets.

The recovery plan included store revamps, a focus on big-selling games and consoles and the roll-out of “Next Generation” stores featuring download stations and smoothie bars. Two new format stores are currently operating in Dudley, West Midlands, and Tunbridge Wells in Kent.

Broker Lehman Brothers said it was expecting pre-tax profits of £53.9 million for the year to April 30, at the top end of market estimates. Last year’s haul was £45.2 million last year.

Analyst Christopher Walker said: “HMV has significantly outperformed following a strong Christmas trading statement. In our view, current trading has remained strong with HMV likely to report continued momentum.”

He added: “HMV online continues to grow strongly, with increased website conversion and a strong operation based in Guernsey. We see significant scope for growth from this business.”

Lloyds TSB is reportedly planning to buck the recent trend of calling on shareholders for a capital boost when the bank delivers a trading update on Tuesday.

It is thought the group will not follow the lead of Royal Bank of Scotland and Halifax Bank of Scotland with rights issues, with speculation suggesting that Lloyds will instead stress it has a strong enough capital base and the benefit of good access to funds.

But the group is set to announce a further credit crunch hit as it too has struggled amid the tightening conditions seen this year.

Lloyds, which is the country’s biggest personal current account bank, reported a £280 million knock from the credit squeeze at its annual results earlier this year - a fraction of the writedowns revealed by its rivals.

It boasted of a “prudent” approach that had helped it weather the storm relatively unscathed and is likely to have been less affected again this year than others in the sector, although it is not expected to have been immune to the sudden worsening in money markets seen since early spring. In February, Lloyds also said it had £389 million of remaining exposure to crisis-hit sub-prime mortgages.

Rumours have been flying in the City over which bank will be next to tap shareholders for cash to boost their balance sheets, after RBS’s £12 billion move was seen as having opened the flood gates.

Bank of England Governor Mervyn King said at his latest meeting with Treasury Select Committee MPs that banks should be openly encouraged to launch rights issues to strengthen funding, which is hoped would restore confidence within the sector. The Bank said that fears over banking group balance sheets was leading them to be overly cautious about lending to each other, which in turn was creating problems in the wholesale and consumer lending markets.

With some banks, such as Bradford & Bingley, not ruling out a rights issue in recent comments, Tuesday’s statement from Lloyds will be scrutinised for signs of any potential future plans to make a cash call.

Software group Sage has already stated that half-year results will be in line with market expectations, so the main interest in Thursday’s announcement will be on geographic performance and any update on current trading.

Sage, which supplies business management software and services to around 5.5 million customers worldwide, is likely to reveal a good performance across the UK and mainland Europe and signs of improvement in its troubled US business.

The Newcastle-based firm axed North American chief executive Ron Verni and finance director Jim Eckstaedt last October after disappointing sales figures from the operation. Sue Swenson, a former senior manager at Pacific Bell, took charge of the division at the start of this month.

Dresdner Kleinwort said Sage’s commentary on the US was likely to be cautious, but with little signs of deterioration in other regions.

The broker added in a note: “To date UK, Europe and the Rest of the World have more than compensated for sub-trend US growth. So far, we think there has been no deterioration in these regions with enterprise software peers reporting robust sales and outlook.”

Sage is expected to post pre-tax profits for the half year of around £129 million, compared with the £122 million seen a year earlier. Consensus forecasts for the full-year show profits of £266 million.

Defence contractor BAE Systems holds its annual general meeting in London on Wednesday, while a day earlier it will discover the contents of an independent report into the group’s ethical conduct.

The Woolf Committee, which is headed by former Lord Chief Justice Lord Woolf, was set up at the request of the industrial giant last year.

BAE continues to be dogged by corruption allegations and is under investigation by the US Department of Justice over arms deal payments with Saudi Arabia. And the Serious Fraud Office’s move last year to drop its investigation into alleged bribery and corruption involving arms deals between BAE and Saudi Arabia has been the subject of High Court action. BAE has denied any wrongdoing.

The group’s directors could face some tough questioning from shareholders at the AGM, as well as noisy protests outside by human rights campaigners.

BAE could also use the AGM to unveil a new chief executive. Mike Turner is stepping down this August after nearly six years in the top job, and more than 42 with the company.

The group promised 2008 would be a further year of “good growth” after delivering underlying profits of £1.48 billion for last year. Full-year sales were up 14% to £15.71 billion.