Market Report: Supply chain worries send Boots tumbling

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There seems to be a growing belief in the Square Mile that next week's first-half trading statement from Boots could disappoint.

There seems to be a growing belief in the Square Mile that next week's first-half trading statement from Boots could disappoint. On Monday, Merrill Lynch warned that the retailer's sales performance could fail to live up to hopes, while yesterday Investec Securities suggested that the implementation of a new supply chain system across the group could potentially disrupt its performance and turned more cautious on the stock before the update. As the worries mounted investors rushed for the exit, leaving Boots 16.5p weaker at 663p.

Investec's talk of potential supply chain issues at Boots led to fears that a disaster akin to that witnessed at MFI earlier this month could be on the cards. Like MFI, the healthcare retailer is implementing a new SAP software system to manage its supply chain. Its "all or nothing nature" means that the old system cannot run alongside it and leaves Boots very much at risk to teething problems.

As a result, Investec downgraded its recommendation on Boots, saying: "In order to reflect Boots' increased risk profile and uncertainty relating to SAP changes we are cutting back our stance on the retailer to hold from buy." It believes there are better investment propositions in the large-cap retail arena and urged investors to take a look at Kingfisher, up 2.5p to 311.5p, and Next, 15p higher at 1,627p.

Meanwhile, ultra-bearish comments from Panmure Gordon sent Sainsbury's 2.25p lower to 272.5p. Slashing its rating on the food retailer to "sell" and setting a price target of just 200p, the broker told its clients that next month's business review from Sainsbury's is likely to result in some serious downgrades to earnings and dividends forecasts. The broker predicted that the retailer may have to cut its dividend by up to two-thirds and downgraded its profit forecasts to such an extent that they now stand 50 per cent below the City consensus.

Panmure described its recent visits to Sainsbury's stores as "depressing" and told those investors betting on a bid for the group from a private equity house to abandon that hope. It believes a financial player would struggle to finance a buyout given the meltdown in profitability at the retailer.

The wider FTSE 100 roared higher and closed above the psychologically important 4,600 level, up 28 points at 4,608. This is a new two-year high for the index and is viewed as a bullish signal by chart analysts. Supporting the FTSE 100 was a strong performance by the heavyweight oil sector, which, in turn, was boosted by a renewed surge in the price of crude amid fears of dwindling supplies. BP gained 9.5p to 538p, BG gained 3.5p to 359p and Shell rose 9.75p to 432.25p. Some dealers suggested that the index was also boosted by a massive short position, possibly worth £15bn, being finally closed.

Bid speculation pushed Cox Insurance up 2p to 76p. Elsewhere in the sector, Hiscox put on 6.75p to 177p, Amlin added 0.75p to 150.75p and Wellington added 0.5p to 84.5p. Atrium gained 3p to 186.5p on talk of bullish trading at the group.

A number of brokers warned that the recent move by the telecoms giant Cable & Wireless into the broadband internet arena will hit Easynet, steady at 84.5p, hard. Among them was Investec Securities. Urging investors to sell Easynet stock, the broker argued that profits at the company are almost certain to suffer.

Glanbia rose 4.5p to 181p on whispers that continued cost-cutting has given profits at the dairy group a solid boost over the past two months. Edinburgh Oil & Gas rose 6p to 180.5p on hopes of bullish news from the group in the near future. Some talked of a positive drilling update from the group's Buzzard assets within the next six weeks. CodaSciSys, unchanged at 320p, saw Graham Steinsberg, the group's chief executive, buy 15,000 shares at 327p each. Bryan Hucker, the finance director, picked up a more modest 9,000 at the same price.

Homestyle was steady at 105.5p despite news that Formal Property Management Services had upped its stake to 12.1 per cent. It is still unclear who is behind the Jersey-based investment firm, which is now by far Homestyle's biggest shareholder. Some have suggested that Property Management aims to put the furniture retailer into play. Kier ticked 8p better to 746.5p as traders bet on two PFI deals for the construction group being announced in the coming weeks.

Finally, fears that CardPoint is about to become the next cash machines operator to issue a profits warning sent shares in the group 7p lower to 104.5p. Moneybox led the way last week with a profits alert in which it complained that fewer people are using its machines than it had hoped and also talked about one-off costs associated with upgrading its estate to take account of new chip and pin card technology. According to yesterday's market gossip, CardPoint is also being negatively affected by such factors along with higher-than-expected costs in relation to recent acquisitions.

Market Movers

↑ Tesco 285p (up 9.75p, 3.5 per cent). Unveils a 24 per cent jump in first-half profits as the retailer continues to win market share from its main rivals.

↑ Smiths Group 724.5p (up 10.5p, 1.5 per cent). Donald Brydon is appointed chairman to replace Keith Orrell-Jones, who is retiring.

↑ Warner Chilcott 769p (up 22p, 2.9 per cent). Investors await developments on the US takeover bid.

↑ Civilian Content 13.25p (up 2.88p, 27.8 per cent). Investors continue to move in to the stock after Monday's strong figures.

↑ Conroy Diamonds 3.75p (up 0.75p, 25.0 per cent). SRK Consulting publishes a bullish report about the company's gold prospects.

↑ Pipehawk 16.25p (up 3p, 22.6 per cent). Signs a deal with gas companies in the US for the next phase of its handheld pipe locator project.

↑ Thomson Intermedia 87.5p (up 10.5p, 13.6 per cent). Posts a maiden profit and issues a bullish outlook statement.

↑ Mercury Recycling 25.5p (up 3p, 13.3 per cent). Boasts of a 60 per cent jump in first-half sales and a narrowing of losses.

↑ Severfield-Rowen 465p (up 52.5p, 12.7 per cent). Interim pre-tax profits rise to £5.2m from £3.7m a year earlier.

↑ Walker Crips 122.5p (up 9p, 7.9 per cent). Buys back 150,000 of its own shares at 115p each.

↑ Royal Bank of Scotland 1,580p (up 15p, 0.9 per cent). Positive comments from Dresdner Kleinwort Wasserstein boost the banking giant.

↓ Marks & Spencer 341.5p (down 4p, 1.2 per cent). Issues a dire trading statement and sets a 332p to 380p price range for its £2.3bn tender offer.

↓ LogicaCMG 184p (down 7.75p, 4.1 per cent). Credit Suisse First Boston downgrades to "underperform" from "neutral" on valuation.

↓ Electrocomponents 318.5p (down 8p, 2.5 per cent). Issues a disappointing trading statement.

↓ James R Knowles 37.5p (down 15p, 28.6 per cent). Issues a full-year profits warning.