16 - 22 November 2000

Investors Corner

The Market
Leading shares ended the week weaker, but above their worst levels for the Friday’s session stabilising from their early afternoon lows despite the sharp morning falls in New York, with both the DJIA and Nasdaq index dropping back in reaction to the poor outlook statement after-hours from Dell Computer.
At the close, the FTSE 100 index was 42.0 points easier at 6,400.2, although that was above its early afternoon low of 6,338.5 – hit when the Nasdaq futures went limit-down. All the broader FTSE indices were weaker, with the techMARK 100 index worst off – down 124.0 points at 3,222.48 in tandem with the Nasdaq drop. Volume in London was fairly moderate, with 1.888 million shares changing hands in 112,146 transactions.
UK blue chips started the session weaker on Friday, bucking pre-market hopes for a modest rally after Wall Street’s weaker performance the previous night – with both the DJIA and the Nasdaq index finishing weaker, but above their worst levels. The New York session was very volatile overnight affected by concerns about the uncertain outcome of Tuesday’s US presidential elections, as well as by the stronger-than-expected US PPI data, and continuing nervousness about the outlook for the technology sector.
The after-hours news from computer maker Dell also impacted in London, with Dell reporting in-line Q3 results but warning that next year’s sales growth would be well below historical levels. UK blue chips remained weaker throughout the morning session, with a lack of corporate news, and the absence of any economic data meaning there was little to provide any overall interest.
However, the decline gained pace over the lunchtime session, with the FTSE 100 plunging to its low on worries about the early progress across the Atlantic. Friday was a public holiday in the US, with equity markets open, but bond markets closed for Veterans Day, adding to the uncertainty in New York. As expected, both the DJIA and the Nasdaq fell back heavily from the start, hit by the Dell warning, and by news of downgrades by Morgan Stanley for both the computer market and chip supplier Intel.
By London’s close, the DJIA was off its worst levels but still down 136.89 points at 10,697.86, while the Nasdaq index was off 124.46 points at 3,075.89. Bookham Technology was the FTSE 100 index’s biggest faller again on Friday, continuing its recent miserable post-Q3 results run, dropping 266 pence to 1,560. Late in the afternoon, Bookham confirmed it was unaware of any reason for the sharp decline following the company’s in-line third-quarter results, while Lehman Brothers reiterated its “outperform” on the group, retaining a 2,700 pence target.
Morgan Stanley’s downgrade of Intel also had a knock-on effect on the UK semiconductor market, with blue chip ARM Holdings down 40 pence at 650 pence, and second liner wafer maker IGE off 35 pence at 432-1/2 pence. Other blue chip tech issues also suffered with Nasdaq’s decline – Logica fell 145 pence to 1,725 pence, Sema Group lost 63 pence at 770 pence, CMG eased 47 pence at 1,103 pence, and Baltimore shed 25 pence at 460 pence. Misys, off 35-1/2 pence at 644 pence was also affected by news of a cut in EPS estimates by Lehman Brothers, with the broker keeping a “neutral” stance on the stock.
Elsewhere, BT also provided a big downward weight on the FTSE 100 index, shedding 49 pence at 700 pence as several brokers remained underwhelmed by the group’s proposals for a partial break-up. Charles Stanley downgraded both its short and long-term stances on BT to “sell”, seeing no benefit to shareholders, while HSBC reduced its rating to “add” from “buy” with a reduced price target to 830 pence from 890.
But Goldman Sachs retained its “market perform” and said it was reviewing its forecasts, Lehman Brothers retained an outperformer rating, seeing the stock as attractive at below 700 pence, and Williams de Broe upgraded BT to a “buy” from “hold”, with a sum-of-the-parts valuation of 1,200 pence a share. Other blue chips telecom stocks remained weak, with Colt Telecom down 121 pence to 1719 pence after its Q3 figures earlier this week, while Cable & Wireless fell 30 pence to 825 pence despite strong figures from Australian telco Optus, in which it holds a controlling stake.
“Old economy” stocks remained the preferred positive plays on the FTSE 100 index, with retailers seeing good demand on hopes that UK interest rates might have peaked, and after recent under-performance in the sector. Boots topped the FTSE 100 gainers list, advancing 45 pence to 575 pence, helped by news of the group’s promotion to SG Securities model portfolio, replacing Kingfisher. However, Kingfisher was not upset by the SG move, adding 9 pence at 441 pence, while Dixons firmed 17 pence at 229 pence, and GUS added 23-1/2 pence to 520-1/2 pence.
Marks & Spencer also saw a good recovery after its unexciting interim results earlier this week, up 6 pence at 198-1/2 pence helped by very vague talk of a possible bid from Pinault-Printemps Redoute of France. Food retailer Tesco also found support after the Financial Times reported that influential clothing designer George Davies has quit Wal-Mart owner Asda, lessening competition worries in the sector – Tesco shares gained 9-1/2 pence at 277-3/4 pence.
Among other blue chips gainers, EMI Group stood out, adding 27-1/2 pence at 571-1/2 pence after the firm confirmed that it has been approached by Bertelsmann regarding a possible combination of the German group’s music division with the UK. However, EMI stressed that the proposed transaction does not involve an offer being made for the UK firm.
Elsewhere, CGNU took on 32 pence at 1,030 pence, while Royal & Sun Alliance gained 9 pence at 498 pence, with both of the insurers rallying after recent falls following their unexciting nine-month results earlier this week. Prudential continued to benefit from Casenove’s upgrade of its price target on the stock, adding 25-1/2 pence to 1,020 pence as the company hosted analysts’ meetings in Asia.
BAA found support after news that the UK government is happy with the firm’s ownership of the three major London airports. Commerzbank upgraded BAA to “buy” from “hold” in the wake of the news, with the stock adding 9 pence at 561 pence. NSB Retail led the mid-cap gainers, adding 22-1/2 pence at 187-1/2 pence after it confirmed a conditional agreement to acquire STS, a privately-owned retail software solutions business based in Montreal, for around £272 million. The acquisition is expected to enhance earnings immediately, and the structure of the deal is expected to minimise tax on profits at STS for several years, NSB said.

Marks & Spencer
Marks & Spencer (M&S), the food and clothing retailer, reported a 58 per cent increase in pre-tax profits to £180 million for the six months to 30 September. Group sales were level with last year. Meanwhile the UK Retail business 5 week sales to 4 November were down 8.4 per cent.
M & S has taken the decision to close six UK satellites (Bristol, Bromley, Edinburgh, Leeds, Norwich and Watford) and reduce footage in a further two (Bath and Derby), representing 170,000 sq ft in the first half of the next financial year. It is expected to upgrade the main stores in these centres, and there will be no redundancies, with all staff being re-deployed. For the full year, this action will generate an asset write-off charge of approximately £44 million.
In UK Retail, the fall in profit was largely attributable to £28 million of one-off operating costs. The poor sales performance in the last five weeks has been distorted by a comparison to autumn 1999 when M&S undertook extensive price activity. Without the effect of the uplift on last year’s figures, general merchandise sales would have been down approximately 5.4 per cent, instead of the 12.9 per cent reported. The weighted-average selling space increased by 2.2 per cent.
Within general merchandise overall, volumes increased over the six months to the end of September by approximately 2.5 per cent, and M&S reduced average selling prices by three per cent. More recent trends during the month of September indicate price deflation pressures have eased.
Within adult clothing, performance has varied across the Business Units. For the first half, womenswear sales volumes increased but the average selling price declined by a similar amount, largely due to a more significant summer sale promotion. The net effect was to deliver level sales with the comparable period last year. Customer reaction to some products has been excellent, but the pattern is not consistently represented across all categories (in particular, blouses and knitwear).
Meanwhile the menswear market as a whole is down some three per cent on the year, and M&S has lost market share, but better buying has contributed to a significant improvement in the bought-in margin. In lingerie M&S has been particularly affected by poor availability due to supply chain problems and overall sales have declined, despite favourable reaction to the new ranges. Sales have been stronger in the other general merchandise areas.
Despite particularly strong price competition in the childrenswear market, M&S has managed to hold market share and improve margins while in beauty products M&S is continuing to develop and grow this business, adding new products and designer ranges, including 400 new lines before Christmas.
At the half year, food sales improved by 2.6 per cent, as M&S maintained its market share, and it has since had a good start to the autumn season. Food inflation was approximately one per cent. At the half year, the group had increased the net achieved margin by over 0.5 per cent while controlling operating costs. UK Retail operating expenses in the period increased by approximately 5.6 per cent.
M&S improved its international performance during the period. Sales increased by five per cent, and it has broken even at an operating profit level, compared to a loss of £20.1 million in the comparable period last year. Sales in Europe were level (+0.3 per cent) overall, although trading in Germany and France remains difficult. The currency impact of a strong Pound and Dollar, together with a weak Euro, increased reported sales by £13.9 million and improved the operating margin by £1.7 million.
In Financial Services, the cost to the group of accepting generic cards has been some £16 million, with third party credit card charges of £4 million, and a directly attributable reduction in the profits of Financial Services of approximately £12 million.
M&S is working on a number of short-term actions that will improve availability of fast selling merchandise in its stores during the critical weeks leading up to Christmas. The group is desperate to catch up with its high street peers – but it still has a long way to go.