City diary: Week ahead in the markets

By This Is Money
Updated: 11:01 EDT, 15 April 2011

Annual results from Tesco and Argos owner Home Retail Group will keep the beleaguered retail sector in the spotlight.

MONDAY

No major company or economic news is scheduled.

TUESDAY

Tesco chief executive Philip Clarke will present his maiden full-year results a month after taking the top job at the supermarket giant.

As well as having a tough act to follow in Sir Terry Leahy, Mr Clarke is faced with tough trading conditions as spending slows and cost pressures mount.

Rival Sainsbury's recently shocked the market with fourth quarter like-for-like growth of 1% excluding fuel, implying an underlying fall of up to 1% when VAT is stripped out and an even bigger decline after inflation.

The sector has been slashing prices to lure in cost-conscious consumers. Official inflation figures this month revealed that food prices declined by 1.4% in March - the biggest month-on-month drop since between June and July 2007 - as supermarkets rolled out heavy discounts.

This helped the overall rate of UK inflation to ease back to 4% from 4.4% in February.

Tesco recently went head-to-head with closest competitor Asda with a £200 million price war and promised to pay shoppers 'double the difference' on products found cheaper at the Walmart owned rival.

It has been upping the ante since a poor Christmas left it trailing behind Asda. Tesco posted a sales rise of 0.6% for its six-week festive period, against a 2.6% hike in like-for-like sales at Asda for the final quarter of 2010.

Analysts believe that Tesco was badly hit by the weather over Christmas, but the recent Sainsbury's disappointment has highlighted that trading has remained tough since then.

Clive Black at Shore Capital is forecasting zero growth in like-for-like sales during Tesco's final quarter to February 26, excluding VAT.

He believes non-food sales will have acted as a drag on the overall performance during the quarter as consumers cut back on non-essentials.

Despite this, Tesco is still expected to report another year of record profits. Analysts are pencilling in underlying annual pre-tax profits of £3.8bn against £3.4bn the year before.

Its growing international business is expected to have helped offset a tougher UK market, although its ill-timed foray into the US through the Fresh & Easy chain is still set to remain in the red. Tesco said at the half-year stage that it would not reach profitability for two years.

The market is also looking for an update from Mr Clarke on Tesco Bank as government plans to improve competition in the banking sector is seen as offering significant potential for the group.

Royal Bank of Scotland will be the first of the big banks to face shareholders since the pivotal report by Independent Commission on Banking (ICB) when it holds its annual meeting.

Bonuses and the ICB's review of the sector are likely to be top of the agenda, but there will be no shortage of issues up for debate at the investor gathering in Edinburgh.

The meeting comes a week after the ICB released its interim report revealing plans to ringfence retail operations from investment banking.

The AGM also follows the part-nationalised bank's disclosures on executive pay, which caused controversy last month in light of the sector's Project Merlin deal with government to rein in bonuses.

It emerged that RBS boss Stephen Hester was awarded an additional £4.5m potential shares windfall on top of his £2m annual bonus for 2010, which was not originally revealed under the Merlin agreement. Meanwhile, RBS also admitted it paid 323 code staff - those deemed to be in risk-sensitive roles - £375m last year.

Advisory group Pirc has already slammed the group's executive pay plans and is recommending shareholders oppose the remuneration report at the AGM. It said new long-term incentive awards of up to 400% of salary were 'excessive' and noted that RBS pays above average for both its highest paid director and average executive salary.

But attention will also focus on RBS's prospects following the ICB report, which was met with some relief in the City. There were fears that a full-scale separation of retail and investment banking was on the cards, which would have had serious implications for RBS.

The more moderate plans to ring-fence the two gave a boost to RBS shares as the bank appeared to have escaped the worst case scenario. Of course, there will still be sizeable costs involved if the ICB plans go ahead, while the bank may also face questions over the impact of the ICB's aims to increase the capital ratio set aside by banks to at least 10%.

Shareholders may likewise focus on the outlook for a return of its 83% Government-owned stake back into the private sector.

Mr Hester was reportedly discussing the possibility of a partial sale this year during a recent round of meetings with major shareholders. However, it is clear the ultimate decision lies with the Treasury and UK Financial Investments, the body that manages the Government's bank holdings.

With RBS in the red by £1.1bn in 2010 despite clawing its way into profit during the final three months, it has some way to go in its recovery. Yet a sale of RBS stock could be a more symbolic move, given the sheer scale of its State-backed rescue.

Fashion group Burberry is expected to provide an insight into how the catastrophe in Japan has affected its business when it updates investors.

The Japanese market, which accounts for about 18% of Burberry's operating profits, is likely to have been affected after the country was left reeling by the earthquake, tsunami and nuclear disaster.

The group's trading update for the first quarter of 2011 is unlikely to be significantly impacted but the company will be pushed for details on trading since the disaster.

Burberry runs two stores and 13 concessions through a joint-venture in Japan but a licensed dealer also sells its goods to about 800 outlets in the country.

Under its current agreement, Burberry is entitled to a minimum payment of £50m a year from its licensed partner that covers Japan but it may choose to waive this in light of the severity of the disaster, according to John Guy, an analyst at Royal Bank of Scotland.

This could result in a 25% fall in licensing revenues in the year to March 2012, which would lead to a 5% hit to the group's earnings, he calculates. But although in the short-term Burberry's Japanese business may experience some difficulty, Mr Guy believes the group's long-term vision for the country is impressive, with plans to expand its joint-venture and sell more higher margin accessories.

Elsewhere in Asia, Burberry's growth story is also impressive. It last week hosted a party to mark the opening of its flagship store in Beijing, featuring rock bank Keane's first ever gig in China. Burberry currently has nearly 60 shops in China and this is expected to grow to 100 in the next five years.

Burberry's trading in the past quarter is expected to have been strong, with continued growth in the UK and overseas. RBS expects like-for-like retail sales growth to have slowed to 10% from 14% in the previous quarter but this is due to be offset by growth in wholesale revenues.

RBS predicts that Burberry will report a 25% increase in revenues to £1.5bn in the year to March, and a 59% increase in underlying profits to £355.2m.

Reed Elsevier, SABMiller and Hargreaves Lansdown will release trading statements.

The Office for National Statistics will publish trade figures for February and producer prices for March.

WEDNESDAY

The owner of catalogue chain Argos is expected to add to the gloom surrounding high street sales when it reveals its full-year results.

Home Retail Group, which also owns Homebase, has already cut profit forecasts as it battles with "difficult and volatile" conditions. Home Retail management expects pre-tax profits for the year ending February to come in at between £250m to £255m, down around 14% from profits of £293 million in the previous financial year.

Argos saw like-for-like sales drop 5.6% in the year, while Homebase saw same-store sales fall 0.3%.

Home Retail said the video gaming market continued to be weak, offsetting strong performances for laptops and tablet computers and further growth in the white goods and toy categories.

The City will also be looking for updates on where the company sees costs heading. Home Retail has warned that cost inflation and investment in long-term initiatives means overheads are likely to be moderately higher this year. But the group has already rolled out a series of cost-cutting initiatives and analysts are concerned there is little room for further savings.

Earlier this year, shares in the group rallied amid speculation over a takeover bid from US giant and Asda parent Walmart. Analysts will be looking for any suggestion the company is open to a sale.

John Guy, an analyst at Royal Bank of Scotland, said there were concerns for the year ahead related to increased cost pressures and weaker trading at Argos and Homebase.

'In our view, the underlying fundamentals remain fragile,' he said. 'Chief executive Terry Duddy and chief financial officer Richard Ashton remain cautious into the financial year to 2012 in terms of trading, cost pressures - wages, rents, utility, fuel - and reduced cost savings opportunities for both Argos and Homebase.'

First quarter figures from household goods giant Reckitt Benckiser will put the firm in the spotlight again following recent shock news that its boss of 16 years is to retire.

Reckitt's shares slumped 7% after it revealed that well-respected chief executive Bart Becht - credited with driving rapid growth at the group since the 1999 merger of Reckitt & Colman and Dutch group Benckiser - is to stand down in September.

He will be succeeded by 25-year Reckitt veteran Rakesh Kapoor, but news of the change took investors by surprise.

Analysts at Royal Bank of Scotland called Mr Becht's departure an 'enormous loss' for Reckitt.

'His track record in creating value for shareholders during his tenure is an outstanding one, with Reckitt outperforming the FTSE All Share index by more than 500% since 2000,' they added.

In terms of the first quarter update, the RBS team are forecasting 3.5% first quarter underlying sales growth in the consumer business, with flat sales in Europe and North America balanced by 14% growth in developing markets.

Soaring commodity prices are also likely to put further pressure on profit margins, they added.

Reckitt was able to increase 2010 profits by 13% thanks to the developing markets performance and said it was targeting further sales and profits growth in 2011, although at a reduced pace due to a tough global economic backdrop.

The Slough-based group said that as well as higher input prices it had to up promotional spend in the fourth quarter amid competition in the industry. It also warned targets could be revised downwards if generic competition emerges for its heroin substitute Suboxone in the US.

The group is shifting sales towards a new patent protected version of Suboxone to head off the threat to its tablet-based treatment.

Reckitt makes some of the world's best-known household products across health, personal care and food - ranging from Nurofen and Cillit Bang to French's Yellow Mustard and Dettol.

The Bank of England will release minutes of the April meeting of its rate-setting monetary policy committee. And the Council of Mortgage Lenders will put out gross lending figures for March.

THURSDAY

A dire month for the high street will be revealed when the Office for National Statistics (ONS) releases retail sales figures for March.

The ONS is expected to show a 0.5% month-on-month decline as consumers rein in their spending in the face of serious headwinds blowing against their purchasing power.

The picture of the retail sector since Christmas is already quite clear as a raft of surveys and company updates from the likes of the British Retail Consortium (BRC) have shown an industry under severe pressure.

Entertainment group HMV, Currys owner Dixons Retail and children's clothing retailer Mothercare have all issued profits warnings, while wine merchant Oddbins entered administration.

The BRC added to the gloom when its most recent survey revealed total retail sales were down 1.9% in March - the biggest decline since the start of the trade body's monthly survey in 1995.

The slowdown comes as consumers watch their spending amid uncertainty surrounding the health of the economy and the impact of public sector cuts. Meanwhile, inflation is well above the Government's 2% target, squeezing household incomes.

Consumer spending power suffered its first fall in 30 years in the final quarter of 2010 as wages failed to keep up with uncomfortably high inflation.

Howard Archer, chief UK economist at IHS Global Insight, said: 'Consumers are clearly less able and willing to spend as their purchasing power is squeezed hard by high inflation, muted wage growth and the increasing fiscal squeeze.

'Furthermore, serious concerns over jobs and the economy are also weighing down on consumer confidence and willingness to spend. In addition, the weak housing market is dampening consumer spending.'

Software company Autonomy is scheduled to reveal its first quarter results.

Nick Raynor of online broker The Share Centre commented: 'These figures will hopefully shed some light on Autonomy's next step and where the share price is moving to.

'According to the company many analysts do not understand the business, however if there was more clarity available then this issue could be resolved. Until such times we retain our view to 'sell' as the price looks overvalued at present. These results may prove different, although we feel it is unlikely.'

Anglo America will release a trading statement.

FRIDAY

Good Friday bank holiday.