City diary: Week ahead in the markets

By This Is Money
Updated: 12:08 EDT, 8 April 2011

Retailers will be under the spotlight next week when JD Sports Fashion, stationery chain WHSmith and department store Debenhams update the market.

MONDAY

The Independent Commission on Banking (ICB) will release its interim report.

TUESDAY

Punch Taverns will be pumped for more details about its plans to call time on 2,500 pubs when it reports half-year results.

The group, which is one of the UK's biggest pub companies with around 6700 outlets, last month announced a radical restructuring scheme under new boss Ian Dyson in a bid to pay down its £3bn debt mountain.

The plan involved demerging its Spirit division of own-managed pubs, including brands such as Chef & Brewer, Fayre & Square and Flaming Grill, to create two separate listed companies by the end of the summer.

The demerger would leave Punch with about 5,200 leased and tenanted pubs, which the company expects to reduce to around 3,000 through disposals over the next three to five years.

A further 450 pubs are to be offloaded from the Spirit business leaving it with about 950 outlets. The move is designed to allow to allow each division to pursue their own growth plans.

Mr Dyson, who joined in September from Marks & Spencer, said the current structure was unsustainable and the two arms would be better off apart.

The UK's pubs have been hammered in recent years by a toxic combination of the smoking ban and the recession, which has prompted more people to drink cheap supermarket beer from the comfort of their homes.

But while Punch has suffered badly over the past few years, it recently surprised the market with better-than-expected sales figures.

Like-for-like revenues at its managed estate rose 8.6% in the 12 weeks to March 5 driven by strong food sales. And in the leased pub estate, the reduction in net income narrowed to 6.1% from 7.9% in the first quarter.

Most analysts are still digesting Punch's turnaround plan, but Simon French at Panmure Gordon expects the company to report a 6% decline in underlying profits to £62.6m in the six months to the beginning of March.

He said the demerger would unlock value in the Spirit business while there was further turnaround potential at the remainder of Punch.

Analysts expect full-year profits to decline 5% to £124m.

Inflation is expected to hit 4.5% on as the rising price of oil continues to impact the economy.

The Office for National Statistics' monthly reading of inflation is forecast to show that the consumer prices index (CPI) climbed from 4.4% in February, which would be more than double the government's target of 2%.

The continued inflation spells more bad news for households struggling to pay their bills and for savers whose nest eggs are being eroded by a combination of low interest rates and higher prices.

A basic rate taxpayer now needs to find an account paying at least 5.5% just to stop the value of their savings diminishing.

The retail prices index (RPI), which includes mortgage costs, is expected to remain at 5.5%.

Inflation is being driven by the rising cost of oil, which is being pushed upwards by the conflict in Libya, and has inflated the price of petrol at the pump and transport costs.

However, there has been some downward pressure on inflation after a British Retail Consortium survey showed that shop prices fell by 0.3% month-on-month as retailers held record amounts of promotions to attract cautious customers.

If CPI rises to 4.5% in March, it would be another 29-month high and add to pressure on the Bank of England, which is facing calls to raise interest rates from their record low of 0.5% to beat down prices.

Consumers have been warned that inflation is due to intensify after the manufacturing sector reported that factory gate prices rose at their fastest rate since October 2008, as they passed on the soaring cost of oil, food and other commodities.

Meanwhile, there is speculation that power companies are preparing to hike utility bills by up to 15% by the summer, which will further increase the pressure on consumers and inflation.

The Bank has warned that CPI could push beyond 5% in coming months although it expects the rate to fall back again by late 2012.

UK trade figures will be released by the Office for National Statistics. The RICS housing market survey of the UK is also scheduled.

WEDNESDAY

Retailer JD Sports Fashion is expected to announce a 17% increase in profits as it shrugs off the gloom surrounding the high street on Wednesday.

Sales at JD, which operates 350 JD Sports and Size? outlets in the UK, have grown rapidly over the past year as its ranges of fashion and sportswear have proved popular with customers despite the squeeze in consumer spending.

Its growth has also been fuelled by a series of recent acquisitions and through stealing market share from its ailing rival JJB Sports, which has been forced to push through a rescue deal with creditors in a battle for survival.

The snow over the key Christmas trading period played havoc with many retailers but could not halt JD's momentum. In the latest of a series of bullish trading updates, it reported that same-store sales were up 2.5% in the last five weeks of 2010.

The Bury-based retailer also said its pre-tax profits for the year to January 31 would exceed the City's expectations of £75m.

Analysts now forecast that pre-tax profits will rise to about £79m in the year.

But the market will be on the look-out for any hint that JD has in recent weeks been hit by the slowdown in consumer confidence that has depressed many retailers in 2011.

JD has already warned that 2011 was likely to be tougher as a result of VAT's rise to 20% and the increasing cost of raw materials, especially cotton.

JD has expanded its appeal in the last year after it acquired brands such as Sonneti, Chilli Pepper and Nanny State and rugby brands Kooga and Canterbury to help give it a point of difference over competitors.

It also moved into France last year with the acquisition of Chausport, which has 73 stores.

An approach to buy JJB but was given short shrift by its rival, which refused to give it enough information to put in a proper bid.

However Singer Capital forecasts that JD will have net cash of £100m by January 2013, which will provide the firepower to make more strategic acquisitions.

Fresnillo and ASOS will release trading statements.

THURSDAY

Department store chain Debenhams is set to report an increase in profits when it unveils first-half results, as its policy of selling more own-label ranges pays off.

The group, which has 167 stores in the UK, Ireland and Denmark, recently said it expects to meet the City's profit forecasts for a 4% rise in profits to £128m for the six months to February 26.

This is despite same-store sales having declined 1.5% in the period following the increase in VAT to 20% in January and the disruption caused by the snow in December, which wiped as much as £30m from its sales.

Debenhams' strategy to deal with the tough conditions on the high street involves sourcing more own label ranges to boost its margins.

This has also helped it combat rising costs, including cotton which doubled in price over the past year.

It recently launched a nationwide campaign advertising its ranges of clothes and accessories from designers including Jasper Conran, Jonathan Saunders and Jonathan Kelsey.

Meanwhile it has chased business by holding attention-grabbing sales, such as its current offer of up to 70% off products in various departments. But while Debenhams' profits may please investors, its sales figures have been less satisfying, after they deteriorated in the final weeks of the first-half.

Chief executive Rob Templeman recently warned the next six months would continue to be difficult as consumers' disposable income is squeezed by inflation, public sector spending cuts and higher taxation.

Analysts will be looking with interest at what the company has to say about trading at the start of its second half.

Stationer and confectionery chain WHSmith is set to reveal another uplift in profits despite declining sales.

The chain, which owns 573 high street stores and 516 outlets in travel hubs such as airports and train stations, said same-store sales dropped 7% in the eight weeks to January 22 as a result of difficult trading conditions.

At railway stations, airports and other travel sites, the company reported a 3% decline in the 21 weeks to the same date.

Matters were made worse by December's snow, particularly at its travel business, which suffered as flights and trains were cancelled.

Chief executive Kate Swann described the performance of both divisions as resilient and said the company remained on track to meet expectations.

Analysts had expected a fall of 5% in the high street division and 1% in the travel stores, but this prediction was made before the snowfall.

But while WHSmith, like many retailers, is expected to reveal that trading has remained tough in subsequent weeks, its profits are likely to have grown as a result of a plan to sell more high margin goods

The company has moved away from lower-margin entertainment items such as CDs and DVDs and concentrates more on selling its core range of confectionery and stationery.

Group sales could receive a boost from new store openings after the group bought 22 sites from the administrator of British Bookshops and Stationers for £1m.

The retailer said the stores, based across the south of England, will trade under their current name for the timebeing.

UBS believes its book sales could also benefit as rival Waterstone's closes stores.

Analysts predict WH Smith will make £93m pre-tax profits in the year to August 2011, a 4.5% increase on the previous year.

FRIDAY

Ladbrokes and Aggreko will release trading statements.