FTSE preview: Marks & Spencer meeting the city's focus

Jul 6 2008

Marks & Spencer’s annual meeting will be the highlight of the corporate week, but the bad news from the housing sector is set to continue with updates from Barratt Developments and Persimmon.

Retail giant Marks & Spencer’s annual meeting on Wednesday is likely to be an uncomfortable affair for chief executive Sir Stuart Rose.

A shock profits warning last week after the group’s worst like-for-like sales performance in three years during the 13 weeks to June 28 dealt another blow to the M&S share price, which is just a third of levels seen a year ago.

The bleak high street conditions are set to continue well into 2009, offering little immediate respite for investors and analysts have rushed to downgrade forecasts.

But the abrupt departure of Steven Esom from the helm of the food business may prompt questions over the direction of the division, which has been weakened by supermarket competition and shoppers trading down amid soaring inflation.

Shareholders at the meeting in London’s Royal Festival Hall may also voice concerns over Sir Stuart’s appointment as executive chairman - in breach of corporate best practice - following the retirement of Lord Burns.

Sir Stuart, who has agreed to stay with the group until 2011, has attempted to soothe concerns among institutional investors by submitting himself to a yearly re-election.

However, pension fund adviser PIRC said last week: “Wednesday’s surprise profit warning will only further fuel investors’ worries over the company’s strategic direction and governance.”

Investors will also vote on the firm’s remuneration report. The latest annual report showed that M&S has cut its bonus targets for top directors as high street trading becomes ever-tougher.

Sir Stuart will have to grow M&S’s earnings per share by 8% above inflation over the next three years to achieve a maximum bonus of 400% of his £1.13 million salary under its long-term incentive scheme.

This compares with 12% in the previous year, although the company insists the new target is “at least as challenging” in the gathering economic gloom.

The impact of the consumer slowdown and England’s failure to qualify for Euro 2008 will become clearer on Thursday when the owner of retail chain Sports World publishes its full-year results.

Sports Direct International, majority owned by Newcastle United chief Mike Ashley, is expected to deliver underlying earnings of £148 million for the year to April 27, well below last year’s £191 million.

Conditions on the high street have taken a sharp turn for the worse, while earlier this year it was estimated that the national team’s failure had hit the firm to the tune of about £70 million in lost replica kit sales.

But Oriel Securities analyst Ramona Tipnis said she had not changed her predictions since Sports Direct’s pre-close trading update in April, adding that the business’s lower prices should help weather the retail gloom.

“With customers polarising, either by trading up to more premium brands or by trading down the price chain, they should be slightly more resilient,” she said.

Sports Direct also owns the Lillywhites and a 60% stake in outdoor specialist Field and Trek, alongside brands such as Dunlop and Slazenger.

The company has not been without problems since it was taken public in February 2007, with chairman David Richardson quitting just three months after the flotation.

And Sports Direct was rapped on the knuckles by the Office of Fair Trading in May for enticing customers into stores with a closing down sale - only for the shops to carry on trading.

Homewares specialist Dunelm will give the latest snapshot of the tough retail climate in an update on Tuesday.

Although a faltering housing market creates a difficult market background, the retailer - which trades under the Dunelm Mill brand - said it had continued to attract customers to its stores in a trading update at the end of April.

Will Adderley, chief executive and son of the firm’s founders Bill and Jean, admitted that the wet weather of March and April had helped the group, with the cold snap supporting sales.

But he added that new superstores in Leeds, Bournemouth and Sittingbourne opened so far this year had all exceeded expectations so far. The openings bring its superstores to 76, with a further 13 older format high street shops.

Like-for-like sales in the first 17 weeks of the year were 3.9% ahead, although Mr Adderley cautioned over tough comparatives caused by last year’s wet weather for the rest of the trading year to the end of June, as well as the “challenging economic and trading background”.

Bill Adderley set up the business with his wife Jean in 1979 as a market stall business selling ready made curtains. The first shop opened in Leicester in 1984 and the first superstore was launched in 1991.

Housebuilders Barratt Developments are Persimmon are unlikely to offer any pleasant surprises on the beleaguered property market when they update on trading.

The housebuilding sector is enduring a torrid time as UK property prices decline, highlighted by announcements of job cuts at both Taylor Wimpey and Barratt in recent days.

News that around 1,000 jobs are are under threat at Barratt is not a good sign for the firm ahead of its trading statement on Thursday.

The group is overhauling its offices, closing some and merging a raft of others as it seeks to streamline in the face of an industry downturn. Its jobs blow came only a day after rival Taylor Wimpey announced plans to shed 900 staff and close 13 offices.

Barratt has reportedly struck a deal with its lenders to strengthen finances hit by the housing market downturn, which would be a fillip for the firm, given rival Taylor Wimpey’s failure to complete a planned fundraising scheme to shore up its balance sheet.

Barratt’s shares have been hammered in recent months amid worries over its finances and the prospects for the group as the housing market stalls. Its debt position in particular has come under scrutiny, with the group burdened by £1.7 billion in debt, which it used to buy rival Wilson Bowden last year at the top of the market.

Charles Church owner Persimmon has not escaped the woes faced by its rivals. The group was booted out of the blue chip FTSE 100 Index last month after shares had plummeted. And Persimmon is also thought to have been cutting jobs, while in April it confirmed that projects were being put on hold.

Nationwide house price figures for June showed that the downturn has now wiped 7.3%, or £13,500, off the value of homes compared with their peak in October last year, with an eighth month of falls last month.

Persimmon’s Tuesday update is likewise set to make grim reading, but comments on its tactics to offset the troubles will be watched with interest.

All eyes will be on the owner of high street clothing chain Primark on Thursday when it reveals third-quarter trading figures.

After the gloom from Marks & Spencer this week, City analysts will be keen to see how Associated British Foods has fared.

Profits in the first half of the year for the company - which also makes Kingsmill and Ryvita - rose 5% in the six months to March 1 after another “excellent” performance from Primark.

And Martin Deboo of Investec Securities said he believes the low-cost retailer may have continued to help buoy up the business in the third quarter.

“I think the Primark numbers will be the most closely watched of the figures, in light of M&S this week. My personal view is that Primark should continue to trade quite strongly.”

According to Mr Deboo, the budget fashion chain “may benefit from trading down and therefore continue to grow in like for like sales.”

Analysts will also be interested to see how AB Foods have coped with growing commodity costs in its foods business, particularly with the rising cost of corn oil in the US, where their Mazola brand is the leader in the premium corn oil market.

AB Foods, which has 85,000 employees in 43 countries, had global sales of £6.8 billion last year in its sugar and agriculture, grocery, ingredients and retail divisions.

But Primark hit headlines in June after a six-month BBC Panorama investigation revealed that three of the chain’s Indian suppliers had used child labour to finish clothing. Primark announced that it had stopped buying clothes from the factories as a result.

The City is looking for “stronger than expected” second quarter figures when international recruitment firm Michael Page issues its latest trading update on Monday.

Back in April, the company said UK growth had fallen to single digits as the banking slowdown started to impact on other areas of the business, but its performance for the second quarter is expected to have been “solid”, according to analysts at ING.

The group saw UK gross profits during the first quarter of this year rise by 6.7% to £47.1 million, down from the 16% and 20% growth seen during the last two quarters of 2007.

Michael Page has also seen shares slump to nearly a third of their value in the past twelve months as demand for its recruitment services wanes in the current economic climate.

ING remains worried over a potential European recession but added: “In all, we see a good chance Page will report a stronger than expected Q2 trading update, but that it will also state that visibility is low and that caution is needed, and hence costs will be adjusted if necessary.

“This, we believe will likely not be the shock to the market as seen in Q1 and therefore we might actually see a small positive reaction on the day.”

The company was launched in 1976 by Michael Page and Bill McGregor from an office in London and made its first move overseas in 1985, opening an office in Australia. Mr Page retired from the business in 1995.

According to its website, at the last count the Group was operating through 149 offices in 25 countries worldwide and 5,052 employees worldwide, although Monday’s report is expected to provide fresh figures.