City diary: Week ahead in markets

By This Is Money
Updated: 10:43 EDT, 1 October 2010

Supermarket rivals Tesco and Sainsbury's go head-to-head with updates next week, while retail giant Marks & Spencer will reveal progress as well.

Up-to-date: We flag up-coming company news

TUESDAY

Tesco's half-year results are expected to reflect a tougher period for the UK's number one supermarket.

The chain's first quarter was particularly poor, with UK sales almost grinding to a halt - at 1.1% - as the grocer wrestled with plunging food inflation.

Analysts are expecting some sales improvement in the second-quarter, to around 1.3%, according to Credit Suisse, while market forecasts for pre-tax profits show a rise to £1.6bn, compared with £1.42bn a year earlier.

The supermarket faces one of its biggest management upheavals, with chief executive Sir Terry Leahy stepping down after 14 years with the business in March. He will be replaced by international and IT director Philip Clarke. Elsewhere, the company has appointed a new deputy chief executive for its US arm, a newly-created role of chief executive of UK business, and its first chief executive of Asia.

Sir Terry has led the supermarket's overseas expansion and his successor has already said this will also be a major area of focus under his reign.

However, the international business has become more challenging in recent months after political unrest in South Korea and Thailand left the division's like-for-like sales 'broadly flat' in the first quarter.

Management will also want to show that losses at Fresh and Easy, Tesco's US chain, are improving after stronger like-for-like sales in the first quarter. But analysts at Evolution Securities said as sales are so low it would take years of improvement to hit Tesco's original targets. The most recent figures from Kantar Worldpanel show Tesco's market share slipping to 30.8% from 30.9%, with growth trailing behind the likes of Sainsbury's and Waitrose.

Tesco has launched its biggest ever Halloween campaign to help fight off competition and said it expected to sell £55m worth of Halloween related goods this year.

But Mr McCarthy said: 'Tesco is underperforming UK peers, is struggling to generate strong international returns and is undergoing a significant management upheaval.

'These factors present considerable risk which we feel is not reflected in the share price.'

Analysts have predicted nearly 3% like-for-like growth for Sainsbury's in the second quarter, ahead of the company's own expectations of 2% and up on the 1% growth it saw in the first quarter.

The City will be hoping for payback from the retailer's investment in non-food sales and in store space expansion, as well as news on current trading following a re-launch of its upmarket range.

The UK's third largest supermarket - which has identified non-food sales and smaller convenience-style stores as key areas of growth - remains on track to open 1.45m square feet in new space during the current financial year as competition for hard-pressed shoppers intensifies.

Last month, the supermarket revealed a multi-million pound overhaul of its Taste the Difference range.

Its resurgent performance in recent months has seen its market share rise to 16% from 15.8% a year earlier, according to Kantar Worldpanel figures, and it is forecast to turn in a full-year profit of £655m, up from £610m last year.

Andrew Gwynn, research analyst at Merrill Lynch, said: 'Recent market share data for Sainsbury bodes well, suggesting that the group is currently trading ahead of our expectations, albeit, trading lifted more by inflation than volume growth.'

He added: 'We see the near-term story for Sainsbury as solid with respectable profit growth too.

'In the medium term, we believe that years of investment in the property pipeline and non-food offer will be increasingly visible.'

WEDNESDAY

Pitcher & Piano and Tavern Table group Marston's will report back on trading after a marked recovery over the past year.

The group returned to growth in revenues and profits at the half-year stage despite tough conditions. Marston's, which also runs a brewery making ales such as Pedigree and Hobgoblin, reported underlying profits up 0.4% to £27.8m in the six months to April 3.

Analysts predict like-for-like sales up 1.7% in the first 43 weeks of its year and a narrowing in leased pub profit falls during the third quarter, to a drop of 3% from 4% in the second quarter. The market consensus is for a 4% rise in full-year profits to £73.4m.

Marston's has embarked on a scheme to launch 60 large managed pub-restaurants over three years to tap into the higher profit margins available on food sales. The Wolverhampton-headquartered group is also overhauling the terms of its struggling tenanted estate, which includes the launch of franchise-style agreements.

This will see around 600 pubs switch to new contracts whereby the landlords retain a percentage of revenues and are responsible for employment of pub staff, while Marston's handles all other costs. Marston's has 2,159 pubs across the UK, of which 1,671 are tenanted and 488 managed. It employs more than 12,000 staff.

Online gambling business Sportingbet is expected to have received a profits boost from the World Cup, but the City will be more focused on potential takeovers at the firm.

After two years of negotiation, earlier this month it agreed with the US Department of Justice to pay $33m (£21m) to settle a US investigation into alleged illegal internet gambling.

It means the firm, which offers sports, casino and poker gambling online, will avoid being prosecuted in the US for accepting online bets made by Americans. Sportingbet will pay the settlement, which is at the low end of City expectations, over an 18 month period. Analysts believe this will pave the way for a potential takeover bid, as the online gambling industry has seen a wave of merger and acquisition activity.

Potential buyers have been highlighted as bwin and PartyGaming, who agreed to merge in July under a £1bn agreement.

Analyst Michael Campbell said: 'The settlement with the Department of Justice now makes Sportingbet a highly probable M&A target.'

It is expected to turn in pre-tax profits in the year to July of £33m, up from £29.5m. The group reported an 18% increase in profits for its third quarter of £12m versus £10.2m last year, and said the fourth quarter started well. The final quarter will greatly depend on those aforementioned sales during the World Cup in June and July.

THURSDAY

Marks & Spencer posts its latest trading update, and the City will be looking for indications as to where new chief executive Marc Bolland plans to take the business.

Mr Bolland arrived in May as a chief executive with a formidable reputation, having led a turnaround of supermarket Morrisons during his tenure there.

He transformed the Bradford-based group into a strong competitor to Tesco, Sainsbury's and Asda, with growth that left its bigger rivals trailing in the past year.

The market is hoping the Dutchman can weave some of his magic at M&S, which has struggled in the recession, and he is expected to outline his strategy for M&S in November when the company presents its half-year results.

In its first quarter, the group posted a rise in UK same-store sales of 3.6%, with food up 1.5% and general merchandise ahead 6%. Analysts said this strong performance was sustained in the second quarter, and possibly even strengthened further.

Geoff Ruddell, analyst at Morgan Stanley, forecast like-for-like sales growth of 3.5% in both food and general merchandise, but said the strong performance makes any radical changes in strategy from Mr Bolland, who joined in May, very unlikely.

'When M&S Food was haemorrhaging share and profitability, we thought that there was a high chance of M&S's new chief executive taking radical action to reposition the business,' he said.

'However, with M&S currently gaining market share in both food and clothing, we think that few shareholders would now welcome a kitchen-sinking exercise.'

Morgan Stanley has upgraded its full year profit forecasts for the high street retailer from £665m to £690m, compared to £632.5m last year.

Fashion retailer Ted Baker is expected to deliver a strong set of half-year results after its spring and summer ranges boosted sales.

The designer invested heavily in its product ranges throughout the financial crisis, and the strategy is starting to pay off with growth in retail sales in the UK and US. It posted a 10% increase in like-for-like sales in the first quarter.

Its wholesale business moved into the positive territory in the first quarter, after double-digit declines for two years, while the company continues to expand its footprint.

The company has 33 stores in UK and Europe, plus 151 concessions and 10 outlet sites. There are a further 16 shops in the Middle East and Asia and nine stores in the United States, a figure due to rise to 13 by the end of the year.

Ramona Tipnis, analyst at Oriel Securities, said: 'We believe that Ted Baker will emerge from the credit-crunch a much stronger brand.

'It has reaffirmed its credentials with its customer base by continuing to invest in product in the form of both design and quality, while selling through quirky stores and focusing on the service element.'

Analysts lifted profit targets after the designer's last update in June. Ted Baker is expected to turn in full year profits of £23.5m at the end of the financial year, compared to £20.3m last year.