FTSE week ahead: Retail to reveal extent of gloom

Apr 7 2008

Updates from the retail and employment sectors will be closely watched this week as investors attempt to gauge the impact of tougher trading conditions.

H Samuel and Ernest Jones owner Signet has suffered amid the high street spending slowdown in the UK, while the group’s significant American operation - branded Kay Jewelers and Jared the Galleria of Jewelery - has also been hit by the more marked woes in the United States.

Tough conditions in America, which accounts for 74% of all trade, overshadowed a slightly more resilient domestic performance in the fourth quarter. It reported an 8.6% slump in like-for-like US sales, which took the shine off a decline of only 1.7% in the UK. Sales across the financial year were up 2%.

The group has been hit not only by less demand from consumers, but also the soaring price of gold, which has forced it to make price hikes. It warned in November that full-year figures would miss market expectations and analysts are now expecting annual pre-tax profits of 333 million US dollars (£167m) when the group reports on Wednesday, down from £213.2 million the previous year.

The group itself has been upfront about the challenges it faces and investors have deserted the stock over the past seven months amid the gloomy outlook, with shares falling from 300p last summer to less than 60p in recent weeks. Its stock market troubles have not been helped by a note from Societe Generale this week which singled Signet out as one of the firms most at risk of a US recession.

Updates from recruitment firm Michael Page - due to issue a first quarter report tomorrow - and rival Hays on Thursday will be monitored for guidance on how turmoil in financial markets has affected business, particularly in the UK.

Both firms have seen business boom in emerging territories, far outstripping their core UK operations.

Last year saw Michael Page post a 52% rise in pre-tax profits to £147.4 million. Nearly two-thirds of profits are now generated outside the UK and the company has more than 5,000 staff in 25 countries.

One of the few dents at the end of last year was a four percentage point fall in Page’s UK growth as recruitment activity in the banking sector eased amid the market turmoil.

Fears over massive job losses in the City have seen the group’s shares slump in value by around half since last summer.

Evolution Securities forecast Page’s UK growth to ease to 11% during the first three months of this year, down from the 15.4% for the previous quarter.

But analyst Hector Forsythe said he was expecting another strong quarter overall for the recruit firm, with total growth of 28%.

“Strong growth and robust comments on current trading will be well received by the market,” he said.

It is likely to be a similar story for the UK’s largest recruiter, Hays, which is due to give a third quarter update.

Directors have focused on international business as growth in the UK has slowed, with business soaring on mainland Europe and in Australia.

Total net fees during the first half to December 31 rose 26% to £374.8 million, compared to a 13% rise for the UK to £225.3 million.

Mr Forsythe forecast like-for-like growth in the UK to have retreated to 8% in the UK, from 11% in the previous quarter. Asia and continental Europe should enjoy an upswing in the high 30s, he added.

“Attention will be focused on current trading and the outlook statement for any indications of weakening market conditions,” he said.

Italian restaurant chain Prezzo is expected to post a healthy profits rise on Wednesday - albeit slightly weaker than expectations seen before Christmas.

Prezzo, which operated 127 outlets at the end of the year, caused analysts to scale back forecasts when it said trading over Christmas failed to make up for a lacklustre November. Pre-opening costs after adding 14 sites in the last two months of the financial year also put pressure on its performance.

The City had previously been looking for a profits figure in the region of £11.1 million, compared with the £9.1 million reported for 2006.

The pizza and pasta chain is majority owned by ASK Central pizza chain founders the Kaye family. They built up its core chain of restaurants in London and southern England, before the business spread its reach nationwide.

Recent openings have taken place in Cardiff, Harrogate and Barnstaple, while the company also has a strong pipeline of new sites planned for this year.

Panmure Gordon analyst James Cooke said: “Our concern is that the sector’s expansion is too rapid, with supply up 5% in 2007. The 12 largest operators are expected to open 200 restaurants in 2008 versus 220 in 2007, as returns from new openings remain high.”

Growth has been strongest in London, but Mr Cooke said Prezzo was shielded from this competition by its nationwide presence and focus on less-competitive towns.

And with an estimated 20% of its covers being outside, he said Prezzo had the most to gain if weather conditions proved kind this summer.

Confectionery business Cadbury Schweppes will ask shareholders on Friday to back plans for the demerger of its American drinks business Dr Pepper Snapple.

The Dairy Milk and Bassett firm had planned to sell the drinks business, maker of Dr Pepper and 7Up, but changed its mind in the summer after the credit crunch hit the ability of potential buyers to raise finance.

The company is instead demerging the business through a listing on the New York Stock Exchange. Shareholders will meet in London to vote on the proposal, with shares in Dr Pepper Snapple due to start trading on May 7.

The remaining Cadbury operation will be the world’s largest confectionery business, with number one or number two positions in 20 of the world’s 50 largest confectionery markets. Brands include Creme Egg and Green and Black’s in chocolate and Trident and Dentyne in gum.

Cadbury will have net debt of £1.65 billion, with Dr Pepper Snapple holding around £1.9 billion. Existing shareholders will have stock in both companies.

Brewer and pub operator Cains Beer Company is due to issue results on Thursday.

The sector has been under sustained pressure after last summer’s smoking ban hit customers and rising ingredient costs threatened margins. Pubs have also been hit by hefty duty rises for alcohol in last month’s budget.

Liverpool-based Cains, which operates 107 pubs and also sells its own ales and lagers to retailers, has extended its reporting period to 18 months to October 31.

The firm made a pre-tax loss of £1.8 million during the 12 months to April 30 last year, with chief executive Sudarghara Dusanj warning of challenging times ahead.

In January Cains said its performance during the period was in line with current market expectations, but confirmed trading had been difficult across the industry.

Mr Dusanj said he had been on a cost-reduction drive, closing the Preston head office of June 2007 acquisition Honeycombe Leisure, a rival North West pub operator and moving it to Cains’ Liverpool headquarters.

The group has also been increasing the use of Cains beer across its estate.

Cains’ losses for the 18 month period are forecast to have deepened to £3.1 million.

The firm, which was bought in 2002 by Mr Dusanj and his brother Ajmail, has the capacity to produce around 300,000 barrels a year.

Internet gaming firm 888 Holdings unveils its results for the year to December 31 on Tuesday.

In a February update, the group reported a 36% rise in net gaming revenues during its first full year without any business in the US.

Like other gaming firms, its operations were severely affected by the US internet gaming ban in 2006.

But 888, which operates Paradise Poker, took 213 million US dollars (£109m) in the year to December 31, while fourth quarter gaming revenues from casino were up 33% on a year earlier with the figure from poker 18% higher.

All eyes will be on profitability and outlook on Tuesday. The consensus forecast is for pre-tax profits of 47.4 million US dollars (£23.7m) last year, a rise of 113%.

888 lost more than half its revenues because of the US withdrawal, but has recovered ground through the launch of new casino and poker sites, partnering agreements and expansion in areas such as Latin America.

Its new online bingo site 888Ladies has also attracted hundreds of new customers a day since being launched earlier this year.