Retail takes centre stage this week with a bevy of updates covering the Christmas trading period. While market fears have abated over a festive wipe-out, many retail companies will only post average sales results.
Most analysts remain pessimistic about the sector's overall outlook for 2006 even though an absence of profit warnings and evidence of improved stock/margin management has boosted share prices.
They cite the increasingly indebted consumer, the rising cost of living, a surge in energy and labour costs and continuing competition. Sanjay Vidyarthi, an analyst at stockbroker Teather & Greenwood, says sector-wide like-for-like sales growth will need to be around 4 per cent in 2006 to cover underlying cost growth - a hard ask in today's challenging retail environment.
Doug Hargrove of software provider Torex Retail agrees there will be a slowdown in 2006. But picking sector winners and losers will be difficult as some companies will "keep the customer at the forefront of their thinking, properly stock their stores and continue to invest in IT".
The Bank of England is unlikely to provide any relief this week, with chances of an easing in base rates from 4.5 per cent deemed slim. Analysts think interest will stay on hold until February as the Bank takes into account the improving inflation outlook, the stabilisation in the housing market and a tightening bias in the US and Europe.
Against a backdrop of market share data from TNS, many of the large food chains provide updates this week. The resurgent J Sainsbury and Marks & Spencer are expected to produce solid third-quarter trading results. But while analysts believe Sainsbury's will post like-for-like sales figures (ex-petrol) of 2 to 3.5 per cent following a "pretty good Christmas", management's real test remains tough fourth-quarter comparatives and its ability to transfer sales growth to the bottom line.
Wm Morrison's performance continues to befuddle analysts, as the company is still unable to provide credible market guidance following the acquisition of Safeway in 2004. Jonathan Pritchard at Oriel Securities expects "the Christmas trading period to be poor and to offer holders little solace". He predicts a like-for-like sales slide of at least 4 per cent in Morrisons stores and a relatively poor sales result from the rebranded Safeway stores. With an "Optimisation Plan" expected to be unveiled at the group's interim results in March, commentary is likely to be brief.
In the clothing sector, analysts at JP Morgan expect a relatively upbeat third-quarter announce- ment from Burberry - forecasting a 2.5 per cent increase in retail sales on a like-for-like basis. The purveyor of all things plaid will have been boosted by stronger trading in the US and UK as the weather cooled and stock management improved.
The outlook for former parent GUS is more challenging, despite anecdotal evidence of a strong finish to Christmas trading. While its data-collection agency, Experian, goes from strength to strength, budget retailer Argos and DIY specialist Homebase may have struggled. Analysts at Credit Suisse First Boston predict a 3 per cent slide in Argos's third- quarter like-for-like sales and a hefty 6 per cent slump in Homebase's sales as the DIY market cools.
Trading updates from the smaller clothing retailers - including House of Fraser (HoF), Alexon, Matalan and Mothercare - are expected to be, at best, OK.
As Matalan's peak sales period is late November/early December, the "out-of-town" retailer probably missed out on the late-December surge seen on the high street. Meanwhile, if HoF met market expectations, "it would be a relief", said one analyst referring to the group's recently reduced profit outlook. The group is thought to be losing share to the resurgent John Lewis Partnership - which is likely to have produced the standout Christmas trading result, even if there has been a marked slowdown since.
With entertainment considered the most difficult retail sector last year, little is expected from HMV Group. Deutsche Bank analyst Warwick Okines is looking for a first-half pre-tax profit of £2.1m - versus £10.5m last year. However, the Christmas trading period is the key, with more than 90 per cent of the profit coming in the second half. Mr Okines believes gross margin will slide by 0.2 per cent at HMV UK and expand by 0.3 per cent at its Waterstones book chain over Christmas.
Boots' share price is dictated by concerns about its impending merger with UniChem. Against strong growth in 2005, its like-for-like sales may have fallen a little in the December quarter. But market whispers of a possible profit warning earlier that month came to nothing.
US RESULTS: (final) Alcoa
UK RESULTS: (F) Cobra Bio- Manufacturing; (interim) Inter Link Foods, Northgate
TRADING UPDATES: Alexon, Game Group, Marks & Spencer
UK RESULTS: (F) Innovata; (I) Vantis
TRADING UPDATES: BP, Burberry, Matalan, Morrison, Mothercare US RESULTS: (F) Intel
UK RESULTS: (F) Parkdean Holidays; (I) HMV, Photo-Me International TRADING UPDATES: Boots, Carphone Warehouse, GUS, Ottakar's, J Sainsbury, Signet
UK RESULTS: (I) Broker Network TRADING UPDATES: Body Shop InternationalReuse content