8 - 14February 2001

Investors Corner

The Market
Leading shares closed modestly higher on Friday, managing a positive end to an otherwise dull week, although the FTSE 100 index finished well off its best levels for the day as Wall Street turned mixed and cautious following a batch of contradictory data. At the close, the FTSE 100 index was 4.6 points firmer at 6,256.4 points.
The broader FTSE indices remained mixed, with the techMark 100 and FTSE Small Cap indices in negative territory, but all the others firmer. Volume was fairly solid, with 1.811 billion shares changing hands in 103,026 transactions, with Vodafone, new form Granada, Marks & Spencer and Corus were all actively traded.
UK blue chips moved higher in early deals on Friday morning, recovering after the previous day’s dull performance thanks to an overnight rally on Wall Street, although overall interest was limited by the key US economic data due.
Share prices closed higher in New York after US NAPM and personal consumption and income data showed fresh signs of the economic slump across the Atlantic, which lifted expectations that the Federal Reserve will follow up the 50 basis point interest rate cut with further easing moves.
But the main focus was on the release of key US January non-farm payrolls data, and December factory orders. Friday morning’s UK data had little impact, with the CIPS construction activity index showing a reading of 57.6 in January, up from 56.8 in December.
As the morning session progressed, leading UK blue chips drifted back from their opening highs, but remained firm as the market continued to take comfort from the solid performance on Wall Street in the absence of much else for direction.
However, leading shares were revitalised in the wake of US non-farm payroll data, as market watchers mulled the implications of what most saw as a confusing and contradictory report. Total non-farm payroll employment rose by 268,000 month-on-month in January, while the unemployment rate rose to 4.2 per cent in January compared with four per cent in December. The non-farm payroll gain was notably stronger than expected, while the rise in the unemployment rate was also higher than expectations.
The consensus forecast of Wall Street economists was for total non-farm payrolls to rise by 54,000, and for the unemployment rate to rise to 4.1 per cent. But some market watchers said the massive hike in non-farm payrolls was an aberration and that the other data, notably the unemployment rate and the average earnings figures, added weight to the belief that the economy was slowing rapidly in January.
The fall in numbers of those employed in manufacturing was also seen as negative for the economy, with some pundits suggesting that this decline demonstrated a growing loss of consumer confidence, adding to hopes for further US rate cuts.
By London’s close, the Dow Jones Industrial Average was 22.12 points weaker at 10,961.51, with the Nasdaq composite index 65.27 points lower at 2,717.52. Troubled high street retailer M&S stole the limelight within the blue chips, adding 16-1/2 pence to 240 pence, as the market celebrated its appointment of retail guru George Davies to design an exclusive women’s fashion range.
Davies was the founder of Next, the former Hepworths chain, who transformed the high street in the 1980s. He has signed a three-year contract with M&S, but will not produce clothes under his eponymous “George” label – under which he produces for Asda.
Fellow retailer Kingfisher also found support following last night’s analysts’ dinner in Manchester, with a visit to a number of the group’s stores. Analysts are hoping for comment on reports that the firm is planning a trade sale rather than a demerger of its general merchandising business. Kingfisher shares added 17-3/4 at 480 pence – SG Securities repeated its “long-term buy” stance.
Anglo American saw continued strong demand, rising another 175 pence to 4,500 pence as the market mulled reports of its bid approach for diamonds group De Beers, as part of a consortium including the Oppenheimer family. BNP Paribas was positive on the move, upgrading its stance to “outperform” from “neutral”, with SG Securities and Williams de Broe “buy” ratings on the stock.
Tesco climbed 7 pence to 258 pence as UBS Warburg repeated its “buy” rating and Goldman Sachs reiterated its “Recommended List” stance on the supermarket group. J Sainsbury also found support, adding 11 pence at 376 pence. BAe Systems was supported after unveiling plans to sell its majority holding of around 54 per cent in BAe Systems Canada to ONCAP for around £269 million. Earlier news of a downgrade in rating by Morgan Stanley to “neutral” from “outperform” was brushed aside. BAe Systems shares gained 5 pence at 288 pence.
BAA celebrated top of the range nine-month results with a gain of 4 1/2 pence to 587 pence, with pre-tax normalised profit of £452 million, up from £395 million last time. The airports operator reported a 13 per cent increase in retail income at the nine-month stage, with third-quarter net retail income per passenger up six per cent to £4.11. BAA was positive on the outlook for 2001. Dresdner Kleinwort Wasserstein used the opportunity to repeat its “add” on BAA, as did HSBC Securities and ABN Amro, but Credit Lyonnais Secs retained a “reduce” stance.
AstraZeneca pushed 116 higher to 3,129 ahead of full-year results next week. BT also found gains ahead of its interim results next week, adding 15 at 701. BOC Group too, up 20 at 1,025, also made gains ahead of figures next week. Selected banking stocks put in a rally ahead of their impending earnings reporting season, and as market players awaited the next move in the Abbey National bid saga. Initial Abbey National bidder Lloyds TSB gained 7 at 699, with Abbey National adding 15 at 1,193, but possible counter bidder Bank of Scotland lost 2 at 730.

Somerfield
Somerfield, the food retailer, reported in the AGM statement that weekly sales had stabilised in both fascias and this trend has continued. There remains much to do in order to grow the sales base and it will take time to return to a healthy level of profitability. The company reported a £21.7 million loss for the six months to 11 November.
Turnover also declined from £2.98 billion to £2.46 billion. However, the recovery is becoming more evident as operational effectiveness improves, resulting in better group financial performance towards the end of the first half.
The sales performance since the period end is encouraging. The balance sheet is strong and gearing levels low. The challenge for the board is to continue the development of robust retail formats capable of competing with the best in the industry.
In Somerfield stores, promotional activity is expected to remain a key strength for the Somerfield fascia. The level and mix of promotions have been reviewed in order to provide customers with more appealing and relevant offers. The company has maintained emphasis on “Price Check” but complemented this in larger stores with an upweighted promotional offer.
The company has given notice to end its Argos Premier Points loyalty scheme in order to provide customers with more immediate focused promotional offers. By focusing on the immediate priorities and returning to the basics of food retailing, confidence is returning to stores, evidenced by the notable improvements in morale, measured improvements in service and stabilisation of sales.
In the six-month period, the company has converted a further 13 Gateway stores to the Somerfield format, and completed the final phase of the larger store disposal programme (10 stores).
The Somerfield group remains committed to Kwik Save and the strategy is to operate and develop separately the Kwik Save fascia supported by common central services. In October, a new Kwik Save store was opened in Bootle, Liverpool and since then has been trading successfully. In addition, an extensive store improvement programme began; 66 stores were launched by Christmas and the company expects to complete 200 by the year-end. Kwik Save own label products are being re-launched which will rebuild the Kwik Save brand with Somerfield branded products being removed over time, thereby eliminating brand confusion.
In the autumn and winter of 1999/2000, supply chain problems were a key reason behind declining sales within both fascias and led to very high stock holdings at the year end. Considerable management attention has been given to the supply chain to resolve the problems. Operational effectiveness has improved, particularly in the area of product availability, with stock holdings being reduced to levels that are more appropriate.
Net debt at the period end was £19.8 million, compared with £90.3 million for the prior year-end. Shareholders’ funds were £694.1 million and group gearing decreased to 2.9 per cent compared with 12.6 per cent at the prior year-end. In the period, the group’s re-financing was concluded which, following the disposal of the larger Somerfield stores, resulted in the reduction of borrowings, in line with the group’s new requirements, and the unwind of the swap arrangements in place to cover the US dollar loan note obligations.
The revised facilities comprise a £200 million revolving credit facility and US$81.8 million unsecured loan notes that both mature on 19 March 2003. The US dollar loan is mostly hedged through the holding, on deposit, of US$77.8 million. The total interest charge in the period was £24.6 million, including group re-financing costs of £18.6 million disclosed as exceptional.
During the first eight weeks of the second half, the group like-for-like sales were -1.1 per cent; Somerfield fascia sales for this period were +0.3 per cent and Kwik Save fascia sales were -3.2 per cent. These figures continue the trend that emerged towards the end of the first half and demonstrate the company’s commitment to restoring sales growth. A modest increase in revenue will start to restore profitability although it will be some time before acceptable operating ratios are being achieved.
Efforts to arrest falling sales appear to be bearing fruit, but management admits it is not out of the woods yet. Against the background of a fiercely competitive food retail sector, analysts believe that it is too early to buy into the recovery.