Market Report: Lehman slashes profits forecast for Kingfisher

Kingfisher fell 3.75p to 251.75p, while the FTSE 100 jumped 27.7 points to 5,255.8 after the US broker suggested that the recent underperformance of the group's B&Q chain is a result ofstructural problems at the business.

Lehman found that B&Q underperformed its two major DIY retail peers in the first quarter after registering a like-for-like sales decline of 7.7 per cent, compared with a drop of 2 per cent at Homebase and 4.9 per cent at Wickes. It believes that this decline at B&Q is part of a long-term trend at Kingfisher which started in 2001. Lehman said: "Our analysis of the group's format shows that return on invested capital for new stores now barely covers [Kingfisher's] cost of capital."

The cause of this slide is the relatively low sales per square foot at Kingfisher and the very high costs of real estate and staff in the UK. Rent costs per square foot have risen 24 per cent in the period 2001 to 2004 at the company, while staff costs per square foot is up 22 per cent for the period.

Although Kingfisher has retained its dominant position in the DIY part of the retail arena, the group is facing increasing competition from the likes of Homebase and Wickes, Lehman warns. And the economic environment the company faces at present is far from favourable.

The US broker believes UK consumers will see their disposable incomes come under further downward pressure in the forthcoming months, which is particularly bad news for those selling home-improvement products like Kingfisher. Which is why Lehman slashed its profits estimate for 2006 to £532m from £592m.

Elsewhere, a fresh jump in the price of oil pushed BP 12p higher to 622p, BG Group 10p better to 492p and Royal Dutch 18p stronger to 1,842p. The FTSE 250, which finished 21.9 points higher at 7,772.4, was also supported by solid gains among oil explorers. Venture Production jumped 22p better to 506p, Burren Energy put on 6.5p to 725p, Tullow Oil firmed 4p to 213p and Paladin Resources rose 4.25p to 298p.

ITV lost 3p to 116p on reports the broadcaster had suffered from poor viewing figures during August. Stanley Leisure gave up 6p to 595p as brokers pointed out the stock had gained 10 per cent since the start of this month. Among them was Seymour Pierce, which rates the stock as a "sell".

Pilkington put on 5.25p to hit a new high of 132.25p as the old story of a bid for the glass maker from Japan's Nippon Sheet Glass once again circled the company. Nippon controls 20 per cent of Pilkington and is always cited as the most probable buyer of the company, but those who know the UK group well poured cold water on the story yesterday.

Sceptics suggested the takeover rumours had been revived by brokers looking to generate commission for themselves on what was otherwise a rather quiet day for the stock market. If that is the case, they certainly succeeded as 21 million Pilkington shares changed hands - more than double the volume seen on an average day.

Autonomy, 37p higher to 349p, was boosted by news the software group had won a substantial contract from France Telecom. Merrill Lynch got behind the stock after the announcement and raised its earnings forecasts sharply. The US broker stopped short of putting an outright "buy" recommendation on the company until it explains the implication of its joint venture in China. On paper, Merrill believes the deal offers significant upside to investors, but points out that Autonomy has previously made announcements of similar growth opportunities without delivering a major commercial success.

Mears Group rose 8p to 274p after yet another set of forecast-beating results from the support services company. Mears, which provides maintenance services to local authorities, reported a rise in first-half profits to £4.2m from £2.8m and said its order book is worth £960m. Mice put on 0.75p to 34p after David Lloyd, its finance director, disclosed the purchase of 15,000 shares at 33.5p.

Telspec rose 2p to 21.25p after Colin Blackbourn, the smaller-companies specialist at Hargreave Hale, said he had raised his stake in the company to 5 per cent from 4.2. Telspec supplies broadband internet infrastructure to telecom companies. Innovation Group ticked 2p better to 29.5p on talk the software provider to the insurance industry is close to securing a sizeable contract win. Finally, Globel was unchanged at 91.5p despite the sale of 22,000 shares at 90p by Nigel Gausden, the recruitment group's chief operating officer.