FTSE preview: Credit squeeze impact to be revealed

Apr 14 2008

A clearer picture on the impact of the credit squeeze on consumer spending will emerge this week when a number of retailers present trading figures.

Impressive sales figures from Tesco’s three main competitors have increased the pressure on the supermarket giant ahead of full-year results on Tuesday.

Sainsbury’s threw down the gauntlet late last month with a 4.1% hike in fourth quarter like-for-like sales, seemingly shrugging off the consumer spending slowdown crippling many other retailers. The increase in the final three months helped full-year comparative sales lift by 3.9%.

Morrisons had already pleased the City with a 4.6% increase in full-year sales, which saw Sir Ken Morrison bow out on a high note after 55 years at the supermarket chain.

Meanwhile, Asda’s US parent Wal-Mart reported a “mid-single digit” sales increase in the UK over Christmas and said last week that the supermarket had continued to trade ahead of expectations.

With a share of around 30% of the UK grocery market, Tesco is not expected to be immune from the belt tightening seen among consumers. But industry figures have shown that food and drink retailers are faring surprisingly well, given the wider economic troubles.

While research earlier this week found that almost a quarter of all stock market-listed retailers reported downbeat sales in the first three months of 2008, all listed food firms enjoyed a rise in like-for-like sales - and have done for the past six quarters in a row.

Analysts at Shore Capital are expecting Tesco to post full-year comparative sales including petrol of around 4%, with the market forecasting like-for-like sales excluding petrol at around 3% to 3.5%. Underlying pre-tax profits of around £2.78 billion are pencilled in for the year, up from £2.46 billion, according to Shore Capital.

Given recent speculation surrounding its fledgling US venture, Fresh & Easy, attention will be paid to the chain and its initial trading performance.

Rumours have been flying that the launch has not gone as smoothly as Tesco hoped, with much being read into news last month that the group had halted the expansion of its US chain for three months after opening 60 stores since last autumn.

Tesco insisted that the move had always been planned, but it raised questions over Fresh & Easy’s trading success so far with speculation circulating that the US business had missed internal sales targets.

An analyst at Piper Jaffray in America is also said to have claimed earlier this month that first half sales at Fresh & Easy could be less than a third of the 100 million US dollars expected by the broker.

Tesco has so far held off from providing initial sales figures, saying only at its last trading statement in January that the customer response had been “very encouraging”. There are suspicions that Tesco may not provide much clearer figures for the US arm with the final results, potentially refusing to break it out from the rest of the international business.

America aside, the market will also be keen to hear Tesco’s views on prospects for the British consumer over the next year or so. Shore Capital analysts said that “there is no doubt that compared to a couple of years ago, Tesco management faces greater challenges”. But they added that if the food and drink sector is able to continue weathering the trading storm, Tesco stands to benefit, even if it does have to work harder to gain custom.

The Bank of England’s battle to control inflation will again be under the microscope on Tuesday when the latest official figures on the cost of living are due.

In February, the Consumer Prices Index reached a nine-month high of 2.5% - above the Monetary Policy Committee’s 2% target - and continued pressure from soaring food costs is likely to have kept CPI high during March.

Other factors in play include Chancellor Alistair Darling’s alcohol duty hikes in last month’s Budget, estimated to add 0.06% to the inflation measure.

Rising petrol prices and energy bills are set to have less of an impact than in February however, with utility prices flatter and costs at the petrol pump rising in tandem with the same month last year.

The behaviour of retailers over the early Easter holiday amid poor weather could also influence the CPI data figures.

Investec Securities economist David Page, who predicts inflation unchanged at 2.5%, said: “The big unknown will be the impact of Easter on high street prices. We see softer increases in clothing, recreational goods and furniture, with the last of these falling well short of last year’s increase.”

The Bank’s quarter-point interest rate cut in February is expected to bring Retail Price Index inflation, which includes mortgage repayments, down from 4.1% to 3.9% in March.

Retailers JJB Sports and John David Group, the owner of JD Sports, should present contrasting pictures in full-year results next week.

JD Sports is much less reliant on replica football kit sales - a good position to be in after the England team’s failure to qualify for this summer’s Euro 2008 championships - and is set to outshine its rival in results on Tuesday.

The company defied the gloom elsewhere on the high street in January after a “pleasingly positive” Christmas performance led it to upgrade profit forecasts for the 12 months to February 2 for the second time in a month.

The chain has around 400 stores and its popular ranges, as well as the effective targeting of its core customers with promotions, have helped it avoid the woes seen elsewhere in the sector.

Following the festive cheer, Investec Securities lifted profits forecasts to around £40 million for the full year - well ahead of last year’s £25.1 million.

JJB however will have less palatable news for investors on Wednesday, with consensus forecasts putting underlying profits more than 25% below the previous year at £33.8 million. Falling shirt sales have hit home, with margins suffering from aggressive stock clearances.

Chief executive Chris Ronnie, who took over last summer after founder David Whelan left the business and sold his family’s holding, is looking to increase the group’s proportion of “own brand products” to reduce the dependence on replica kit.

Landsbanki analyst Mark Photiades said: “England’s non-qualification for Euro 2008 and the fact there is now at least two years before another tournament have made the need to diversify even more compelling.

“Rebuilding the profitability of the retail business remains top of the agenda for the coming year, and we expect to see more brands brought in-house in an attempt to drive margin gains.”

Retail chain WH Smith will be the latest high street player to give an update on trading conditions when it releases interim results on Thursday.

The group delivered results in-line with market expectations after steady Christmas trading, with a 2% drop in like-for-like sales described as “decent” by analysts.

But the group echoed comments from its sector counterparts, saying that it remained cautious over consumer spending and would tailor its plans to reflect this.

The market is forecasting little change in the trading outlook at the half-year stage, but will be keenly watching for news on key focus areas for the firm - margins and cost.

Analysts at Landsbanki are predicting interim pre-tax profits of £63 million, up 7%. This time last year, WH Smith reported weak trading in the second half, down 5% on a comparative basis, but this year the early Easter is likely to skew figures. Expectations are for a modest decline in like-for-like sales in current trading so far.

The group may even stand to benefit from any consumer spending downturn, according to Landsbanki experts. A note from the group said: “A cost and margin-focused strategy and a low-ticket product offer make WH Smith relatively defensive. This should mean the shares are a safe haven in a difficult sector in the next year or two.”

Interim results from department store chain Debenhams on Tuesday are likely to offer more evidence of the hard high street conditions faced by retailers this year.

According to consensus forecasts, the company is expected to unveil a 13% drop in pre-tax profits to around £92 million in the six months to March after a period in which like-for-like sales fell 0.7%.

A better-than-expected Christmas showing was followed by a “challenging” January and February, chief executive Rob Templeman said in last month’s pre-close update.

Retail conditions are likely to remain difficult, although Debenhams did improve market share for its clothing ranges during the first half.

But shares in the group have slumped to less than a third of the level at which it was returned to the stock market in 2006 - when the private equity consortium which took the group private in December 2003 netted big profits.

Merrill Lynch, the investment bank which handled the float, sold its entire 6% stake last month for just 60p, also hitting the stock price.

The period of private ownership massively increased the group’s debt burden, making the group less attractive to institutional investors. Debenhams has also embarked belatedly on a revamp of its estate which consists of 140 stores, although the pace of the overhaul may slow in the more difficult climate.

Panmure Gordon analyst Philip Dorgan said: “While conditions remain tough, Debenhams will focus on de-gearing its balance sheet, cutting costs and getting high returns on new stores and refits.

“Debenhams believes that it is still getting good returns on new stores and refits and acknowledges that it underspent in its first year after its return to the public domain.”

Britain’s biggest coal mining company, UK Coal, is set to post a four-fold increase in annual profits on Friday despite lower production levels.

The company has already guided the market towards pre-tax profits of £69 million for 2007, but property is now the main driver of the Doncaster-based firm, which has 76 projects on former coal mining sites.

Management estimates that the value of the firm’s portfolio will stand at £926 million in 2012 - despite the short-term turmoil in the property market.

Earlier this month, UK Coal’s plans to regenerate the former colliery village of Rossington, near Doncaster, with up to 15,000 homes also featured on the Government’s short-list of 15 “Eco Towns”, which will be whittled down to 10 schemes in the next six months.

Prospects for the remainder of the coal business - consisting of four deep pits and seven surface mine operations - have also improved in the wake of rising prices and new long-term contracts with the likes of EDF Energy.

Doncaster-based UK Coal has closed a number of under-performing pits and overhauled working practices, while the new contracts have been secured at much higher market prices as generators adopt the use of clean coal technology.