1 - 7 February 2001

Investors Corner

The Market – tech issues hit hard times
Leading blue chips closed the Friday trading session in positive territory, shrugging aside a very weak start on the Nasdaq as another round of negative earnings news took its toll – with strong demand for traditional defensive stocks offsetting renewed weakness in global technology issues. The FTSE 100 index finished the session up 38.7 points at 6,294.3, just shy of its 6,295 points late afternoon high, and well above its late morning low of 6,223.8 points. The broader FTSE indices ended mixed, but the techMARK 100 index remained very weak, though off its worst – down 36.21 points at 2,780.26. Volume was a solid 1.75 billion shares in 110,012 transactions.
The rout on Nasdaq the previous night after yet more disappointing profits and growth news from several leading US tech stocks weighed heavily on early sentiment in the London market. A raft of bad news from UK and European tech stocks added to the already-nervous tone – sending the FTSE 100 index sharply lower within the first hour of trading. But despite the bad news surrounding the telecoms, chip makers and fibre optic groups, the FTSE 100 index managed to pare earlier losses as a strong showing in defensive issues defused the worst effects of the tech sector losses.
This pattern continued throughout most of the morning, with even the weaker-than-expected fourth-quarter GDP data failing to impact either way. The preliminary estimate of fourth-quarter GDP fell well short of market expectations, up 0.3 per cent in the quarter and 2.4 per cent higher year-on-year. Median forecasts were for GDP to have risen 0.5 per cent quarter-on-quarter and 2.6 per cent year-on-year.
As it was, continued buying of defensive issues managed to cushion the wider market for the rest of the day, and – by early afternoon – the FTSE 100 index had managed to move into positive territory. Even a very weak start on Nasdaq, largely on technology earnings concerns, failed to dull the London market, with some pundits suggesting that Nasdaq’s losses were relatively limited given the raft of bad news reported over recent days. At the London close, the Nasdaq was down 47.84 points at 2,706.44, with the DJIA, having briefly bounced into positive territory – down 58.15 at 10,670.15.
After recent good performances, technology issues came down to earth with a bump on Friday in reaction to US fibre optic group Corning’s gloomy outlook, and Ericsson’s withdrawal from the mobile handset market. But the real killer for sentiment in the UK tech sector, as well as the wider market, was the surprise profit warning from former blue chip Bookham Technology and very weak full-year figures from London Bridge Software.
Bookham warned that it expects to post a fourth-quarter loss of £15 to 15.5 million, wider than previous guidance which indicated an £11 million loss. In response to the news, Bookham shares dropped 207 pence, or nearly 16 per cent, to 1,100 pence. Second-line financial software group London Bridge also came out with bad news on Friday after it reported a fall in full-year adjusted pre-tax profit to £9.252 million, down from £11.053 million last time out, with the company’s own revenue targets missed by 10 per cent. London Bridge shares came off their worst levels but still shed 7-1/2 pence to 397-1/2 pence.
Tech issues continued to dominate on the blue chip and second line fallers list. ARM Holdings was one of the hardest hit, down 26-1/2 pence at 533 pence, Autonomy lost 140 pence to 2,140 pence, Marconi slid 28-1/2 pence to 680 pence and Misys fell 19-1/2 pence to 639-1/2 pence. On the second line, ARC International fell 26-1/2 pence to 297-1/2 pence, Baltimore lost 23 pence at 404 pence, Sema fell 32 pence to 378 pence, while Imagination Technologies – a clear winner on Thursday – slid 9 pence to 253-1/2 pence and Geo Interactive shed 25 to 665.
Pace Micro also suffered after the Financial Times newspaper reported that the company could lose its exclusive deal to supply Telewest with set-top boxes at the end of March. Pace shares lost 79-1/2 pence at 610 pence, while Telewest shed 3 pence at 141. But CMG managed to buck the weak sector trend, recovering 54 pence to end at 1,074 pence.
Elsewhere in the FTSE 100 index fallers, EMI Group fell back as Credit Lyonnais cut its stance to “add” from “buy” on worries over a potential EU probe in to the pricing of compact discs – EMI shares lost 9 pence at 535 pence. Reuters also lost out after a change of stance from Merrill Lynch, with the group cutting its intermediate rating to “accumulate” from “buy”, although it raised its long-term rating to “buy” from “accumulate” – Reuters shares lost 12 pence at 1,146 pence.
Amvescap shed 70 pence to 1,520 pence, hit hard by news that Lehman Brothers has cut its pre-tax estimates and target price for the fund management group – with the 12-month target lowered to 1,530 pence from the previous 1,610 pence. Lehman said it preferred Schroders, up 4 pence at 1,304 pence.
A bounce back in “old economy” issues still provided the only underlying support for the FTSE 100 index, with defensive attractions to the fore. BAe Systems was in demand, surging 11-1/2 pence to 300 pence as US buyers moved into the defence giant – with ABN Amro highlighting the stock’s attractions on Friday.

Dixons
Dixons, the electrical goods retailer, reported that for the six months to 11 November, underlying gross margins continued at a similar level to the second half of last year, although this, as anticipated, represented a year on year decline of 1.3 percentage points of gross margin. The UK division improved cost to sales ratios by a further 0.9 percentage points, thereby offsetting most of the margin pressure and providing an increase in profit against demanding comparatives. The markets in which the UK Retail division operates grew in value by two per cent, with some of the markets slowing in autumn, reflecting weaker consumer confidence following the petrol crisis and floods.
Meanwhile, the brown goods market was strong, with growth in new technologies, such as widescreen TV and DVD being partially offset by a further decline in the games market ahead of the launch of the new generation of games consoles. The PC market was weaker, although those for laptop and portable PCs grew. The domestic appliance market grew slightly. The mobile phone market continued to expand against strong sales last year.
The UK Retail division gained further market share, with all brands recording increases. Dixons sales, at £378 million (£361 million), were up five per cent overall and two per cent like for like. Good sales growth was achieved in laptop PCs and digital cameras and camcorders, although the games market had another difficult period ahead of the launch of PlayStation 2.
Sixty-one stores were converted to the new Dixons 21 concept, which facilitates self-selection of lower ticket products, thereby releasing sales staff to help customers purchasing more complex, new technology products. This new format has proved successful, providing both improved sales and better cost ratios. Further conversions are planned. Three new stores were opened in the period and a further three were re-sited.
Dixons’ Currys chain sales were £705 million (£685 million), an increase of three per cent in total, although two per cent lower on a like for like basis. Six new Currys Marketplace stores were opened, offering greater self-service on smaller ticket items, with increased availability of take-away stock. This concept is being further developed and many of its features are being incorporated into existing stores. In total, 15 stores were opened or re-sited, including the UK’s largest electrical superstore of 55,000 square feet near Birmingham.
The period saw the introduction of a number of other changes at Currys. New advertising that emphasised that Currys was “Britain’s Biggest for Low Prices” was introduced. This was reinforced by a team of independent researchers checking Currys prices against competitors on a weekly basis and by a programme of aggressive price promotions on a wide range of products. The changes being made to Currys have been positive. Although somewhat disruptive in the short-term, they are expected to provide long-term benefits.
In Dixons’ PC World sales grew by 22 per cent to £546 million. Like for like sales increased by five per cent. Despite a four per cent decline in the PC market, PCs increased their proportion of total sales. In addition to providing the latest PC technology at market beating prices, PC World continues to offer an unrivalled range of products and level of service. PC Clinics, which provide a seven-day a week PC repair and upgrade service, were introduced into all stores.
Among its services, PC Healthcheck, which checks and optimises the performance of the customer’s computer, has proved particularly popular. In addition to many other problems found, computer viruses have been discovered and treated on 25 per cent of PCs receiving a Healthcheck.
Dixons opened 10 new PC World Superstores in the first half, bringing the total number of stores to 91. A further six stores are expected to open in the second half of this financial year. PC World Business continued to achieve strong growth in a difficult business market with sales up 44 per cent at £77 million (including internet sales).
In the second half of this financial year, PC World Business will relocate its head office to a purpose built site near Manchester. It will also implement new enterprise-wide systems. This investment will provide a sound base for future growth and allow the PC World brand to attain clear leadership in the small and medium sized business sector, matching its position in the consumer market.
Dixons The Link also had a very strong period, gaining market share in an expanding mobile phone market. Sales were £177 million (£125 million), an increase of 41 per cent in total and 18 per cent on a like for like basis. This sales growth reflects an increase of 60 per cent in mobile connections, being partially offset by declining prices in a highly competitive market.
Penetration of mobile phones in the UK is now estimated to be in excess of 65 per cent. Increasingly this market’s performance will be dependent on new handset designs and the introduction of new technology, which should increase the use of mobiles for data communication. The Link, as the UK’s leading mobile communication specialist, is in a strong position to capitalise on these developments. Twenty-six new stores were opened in the period, taking the total to 244.
Analysts in a review of these recent results expect Dixons to continue experiencing mixed fortunes in a highly competitive UK market, but increased European presence, lower price deflation and an expected upturn in the video games market should offset most of the problems.