FTSE preview: M&S annual profits set to be highlight of busy week

May 18 2008

Annual results from retail giant Marks & Spencer should be the highlight of another busy week for corporate news, with figures also due from pubs group Mitchells & Butlers and babycare retailer Mothercare.

Marks & Spencer’s annual results on Tuesday are set to bear the scars of poor clothing sales in the first three months of 2008, compounding a disappointing Christmas for the group.

Hopes that M&S could post £1 billion in profits for the year to March 31 were inspired by forecast-beating interim profits in November, but these look to have been dashed by the sharp downturn seen since then.

Consensus forecasts put pre-tax profits at around £989 million - higher than last year’s £965.2 million - although the tough high street conditions have delivered the first serious jolt to the recovery of the business led by chief executive Sir Stuart Rose.

Attention will focus on the clothing business following a gloomy sales update from Next two weeks ago. M&S is the UK’s biggest clothing retailer by value and volume.

Investec Securities analyst David Jeary said: “After a disappointing Christmas M&S cannot in our view have escaped the effects of poor weather in March on its clothing business.

“M&S - along with other clothing companies - will be hoping for a reversal of weather patterns and commercial fortunes compared with last year.”

Mr Jeary predicts a 3.6% fall in like-for-like general merchandising sales, as well as a 1.5% decline in food sales.

The company is currently reviewing its food business as it struggles with heavier competition, and could unveil changes such as more product innovation and a decision to sell non-M&S products for the first time.

M&S’s review of its supplier base meanwhile has seen Northern Foods “mothball” its Fenland Foods site in Grantham, Lincolnshire, after refusing to cut a cheaper deal for Italian ready meals, putting 730 jobs at risk.

Sir Stuart could also update on international expansion after M&S announced plans to open its first store in China, and proposals to take a bigger slice of the fast-growing Indian market through a £29 million joint venture with Indian retailer Reliance Retail.

Pubs group Mitchells & Butlers is due to publish the outcome of a strategic review alongside its interim results on Tuesday. This followed a merger approach by rival Punch Taverns - since abandoned - and interest from private equity firms in buying a minority stake in the company.

M&B had initially been in talks with Punch over a series of proposals, including a full blown merger and then a private equity backed bid from M&B for Punch’s managed pub arm Spirit.

But talks between the two firms collapsed, with Punch pulling out of the merger and then saying “any transaction” with All Bar One and O’Neills owner M&B would not be in the interest of shareholders.

The breakdown of the talks was a big blow for M&B’s management, which has been under shareholder pressure since a failed property deal last year left the group with a £274 million loss.

It has also had to trim aims for a full blown sale to private equity as the credit crunch has left buyout firms lacking in funding, but M&B is persisting with the possibility of selling a minority stake. Last month it said it was in discussions over the sale of up to 29.9% to private equity at a “material premium” to its current price.

But there is talk that other suitors may be entering the fray, with Irish racing tycoons John Magnier and JP McManus reportedly adding to their position in M&B, while fellow shareholder, billionaire property tycoon Robert Tchenguiz, is also said to have been adding to his 23% holding in the group in recent weeks.

It is speculated that both the Irish duo and Mr Tchenguiz may be seeking to block private equity from taking a big stake in the company, which may leave M&B with an even trickier situation on its hands.

Meanwhile the group’s interim results will also come under scrutiny.

It said in April that strong food sales were helping the group weather tougher trading conditions this year. But the market will be keen to hear its outlook for the year ahead given the continued clampdown on consumer spending. Operating profits are expected to come in at £159 million, marginally below last year’s £161 million.

Babycare retailer Mothercare is expected to report a near-50% jump in annual profits on Thursday after help from a major acquisition and a surge in demand at its internet and catalogue arm.

Consensus forecasts put profits for the year to March 31 at £33.6 million - well ahead of last year’s £22.6 million - as last year’s £85 million acquisition of the Early Learning Centre also adds to the bottom line.

The group should update on the review of its property portfolio following the deal, as well as the cost savings to be made from the integration of the two businesses.

Mothercare’s fourth quarter trading update in April revealed like-for-like sales at the Direct In Home division up almost a quarter in the three months to March 29 as growing numbers of new mums and dads switched to shopping on the web.

Attention has also focused on Mothercare as a defensive retailer in tougher times as overall UK like-for-like sales during the three-month period were up 2.9%, the same level achieved for the full-year.

Some analysts are less convinced, however. Dresdner Kleinwort’s Sanjay Vidyarthi said: “While we accept that children continue to grow, whether it is sunny or raining, and so there is an element of non-discretionary spend, we wonder if sales are as secure as some think.

“When times are harder, we wonder if, while volumes might hold up, customers could trade down.”

Cathedral City and Clover group Dairy Crest posts annual results on Tuesday after spending the last year battling against the soaring cost of food, fuel and commodities.

The firm, which also owns doorstep milk delivery business Express Dairies, has managed to pass on these costs to customers but warned in March that it would hike prices further to combat the increased costs “as necessary”.

Last week, Office for National Statistics figures laid bare the pressure on firms after home produced food material prices soared by a third in the year to April.

Imported food material prices rose by more than 20% - the biggest annual rate of increase since records began in 1986.

Despite these factors, adjusted pre-tax profits for the year to March 31 should be around 19% higher at £95.5 million, according to consensus forecasts.

The firm has been aided by a renewed focus on its flagship cheese and spread brands, which also include Utterly Butterly and Country Life.

The group will, however, take a £4.5 million hit on losses from an unfavourable supply contract. Results will also be impacted by an expected £9.4 million fine imposed by the Office of Fair Trading, after the group was found provisionally guilty of colluding to fix dairy prices in 2002 and 2003. Dairy Crest is co-operating with the OFT along with several other dairies and supermarkets.

Panmure Gordon’s Andrew Saunders said the group was “regaining momentum”.

He added: “UK cheese prices remain encouragingly firm and Dairy Crest is to pass a milk price rise on to its direct cheese milk suppliers.

“Doorstep prices are also to rise, with the company passing on a 4p a pint price rise, taking retail prices to between 55-59p per litre. This will further help secure margins in the face of rising milk production costs.”

The increasing strength of the euro, and a first contribution from Spanish acquisition Altadis should light up Lambert & Butler maker Imperial Tobacco’s interim results on Tuesday.

Although the £11 billion deal - and the acquisition of US firm Commonwealth Brands - makes comparisons with last year difficult, the Davidoff and JPS firm has gained from price increases across Western Europe as well as the strength of the currency.

Imperial may update on the cost savings it expects to make from the Altadis deal and increase its synergy targets above 300 million euros (£239m).

It could also unveil details of the rights issue with which it will pay for the move - with shareholders potentially to be called upon for £5 billion.

Emerging markets are expected to perform strongly, although analysts will look for signs of volume weakness in Europe.

“Industry watchers will be eyeing volume levels in Europe, which are widely expected to suffer a decline on tighter smoking restrictions in a growing number of countries including the UK, France and Germany,” Charles Stanley analyst Tina Cook said.

She predicts full year profits of £1.41 billion for the year to September 30, compared with £1.24 billion last time.

Imperial was among 11 major retailers and tobacco manufacturers named by the Office for Fair Trading in April over allegations of unlawful cigarette pricing practices.

It said it took compliance with competition law “very seriously and rejects any suggestion that it has acted in any way contrary to the interests of consumers”.

Deteriorating economic conditions and increased competition from Google and other search engines have put Yell shares under pressure in recent months.

The stock hit an all-time low after it warned in February that UK revenues had softened because larger corporate customers were cutting back budgets.

The trading situation raised concerns among some analysts about Yell’s debt covenants, but shares have since rallied after better-than-expected figures from some of Yell’s American peers offered comfort. As well as Yell.com and Yellow Pages in the UK, the company operates the Yellow Book in the US.

Charles Stanley analyst Sam Hart said the focus of annual results on Tuesday will be on the company’s balance sheet and its estimated net debt of £3.7 billion.

He added: “A dividend cut, asset disposals or a rights issue cannot be completely ruled out as the group prepares itself for the downturn.”

The Reading-based company, which also has operations in Spain, was recently boosted by the relaxation of UK price controls. The previous inflation minus 6% control - effectively forcing Yell to cut its Yellow Pages prices - was scrapped in March.

Underlying earnings for the year to March 31 are expected to be around £733 million, compared with £677.5 million a year earlier. At a pre-tax profit level, Numis Securities is looking for £421.5 million, against £418.6 million in 2007.