City diary: Week ahead in the markets

By This Is Money
Updated: 11:29 EDT, 3 June 2011

Retailers have enjoyed a springtime boost from favourable weather but Argos and Homebase owner Home Retail Group and Halfords are expected to say trading conditions remain tough when they update the market next week.

MONDAY

Prudential will release a trading statement.

TUESDAY

The British Retail Consortium and KPMG will publish their retail sales monitor for May.

Nick Raynor of online broker The Share Centre commented: 'April appeared to have been a relatively encouraging month for retailers, with surveys from both the BRC and ONS showing signs of a pick-up in activity.

'However, sales were boosted by the Easter holiday season and the Royal Wedding. With UK consumer confidence falling and real wages lagging behind inflation, the prognosis for the UK retail sector, with a few notable exceptions, does not appear to be promising.'

Aggreko is scheduled to issue a trading statement.

WEDNESDAY

Punch Taverns will update the market with its third quarter sales, but the City will be particularly keen to hear how its radical plans for tackling its £3bn debt mountain are progressing.

The group will sell more than 2,500 outlets over the next three to five years, as well as demerge its estate of own-operated pubs - brands such as Chef & Brewer, Fayre & Square and Flaming Grill - by the end of the summer.

The demerger should boost prospects for the faster-growing Spirit business, which is expected to have a portfolio of around 950 pubs in the future.

Douglas Jack, analyst at brokers Numis, said the current share price - 70.5p, giving the business a market value of £453.4m - is justified by the valuation of the Spirit managed pubs alone.

Across the whole business, Mr Jack expects like-for-like trading to be strong across the third quarter, given favourable weather and beer price increases.

Managed pub like-for-like sales were up 8.6% in the second quarter, supported by refurbishments, while leased pub like-for-like earnings declined 7.8% in the same period, but analysts expect this to improve.

Punch built up its debt mountain through an acquisition spree that included a £2.7bn deal for the Spirit managed pubs in 2005.

In recent years it has looked to pay down debt, which currently stands at around £3bn.

THURSDAY

Halfords will report back on a tough year after a poor Christmas for sales of bicycles and satellite navigation systems more than offset a boost to demand for car maintenance products during a harsh winter.

Poor availability caused by teething problems at its new warehouse in Coventry and problems with suppliers in the Far East contributed to the pressure on sales, particularly for children's bikes over Christmas.

And demand for premium cycles under the government's Cycle to Work scheme, which provides tax-free bikes to workers on a salary sacrifice scheme, was also impacted by recent rule changes introduced by HM Revenue and Customs.

Halfords has reported a recovery for bicycle sales since then, but added that car maintenance sales went into reverse over the spring as a result of tough comparatives with a year earlier.

That led to the company warning that full year pre-tax profits for the year to April 1 were likely to be between £124m and £127m, down from a previous range of £127m to £135m. The previous year the company reported pre-tax profits of £109.7m.

Consensus estimates for group revenues and pre-tax profits are set at £869m and £125m respectively.

The company will also take a £7.5m hit relating to the closure of hardware chain Focus DIY. The payments cover the next three years and stem from guarantees provided by Halfords before 1989 to landlords of properties leased by Payless DIY, which later became part of Focus, when it was with Ward White.

The broader retail sector received a boost from the record-breaking warm weather in April, so the City will want to see if this has had an impact on Halfords performance.

The company has now fully rebranded its Halfords Autocentres business, after acquiring Nationwide Autocentres early last year, and analysts expect this to drive future growth.

David Jeary, an analyst at Investec, said: 'Halfords Autocentres has considerable potential to drive market share gains through a combination of centre openings, increasing labour productivity and service offer extension.'

While currently representing only around 5% of group operating profit, he said the chain had the potential to multiply estimated full year earnings several fold over the longer term.

Argos and Homebase owner Home Retail Group, which reports first quarter figures, will be under pressure to show its fortunes have improved since April's dismal annual results.

The company posted a 13% plunge in profits for the year to February 26 after falling sales at its two retail brands.

Home Retail has already warned of an uncertain year ahead as consumers are squeezed by the January VAT hike and government austerity measures. The group said in April it is planning on the basis that like-for-like sales will decline by low-to-mid single digits at Argos and will be broadly flat at Homebase.

But official figures revealed the record-breaking warm weather in April gave retailers a boost, which could be reflected in Home Retail's first quarter update.

Specifically, the Office for National Statistics and British Retail Consortium said gardening sales, outdoor toys and barbecues sales all benefited from the sunshine - all of which are sold by Argos and Homebase.

Rival B&Q enjoyed strong sales in its first quarter thanks to the sunny spring as customers bought new outdoor furniture and gardening equipment. Its parent company Kingfisher said seasonal sales were up by more than 15%.

But Argos's total sales have been held back by falling demand for so-called big ticket items, as hard-pressed consumer rein in spending on furniture, televisions and video gaming products.

Supermarket Morrisons is likely to face shareholder ire over plans to award shares to its finance director worth up to 230% of his base salary.

The Association of British Insurers (ABI), which represents City investors, and corporate governance advisory firm Pirc have both flagged up the pay deal to shareholders ahead of the company's annual meeting in Bradford.

The ABI has issued an amber-top alert for the pay proposals - a signal that there are issues to be considered before voting on the package.

Britain's fourth-largest supermarket has offered finance director Richard Pennycook shares worth £1.25m, assuming certain criteria are met. The Morrisons remuneration committee offered the package as it considered it 'essential to secure Richard Pennycook's services' as finance director.

The move came after its boss Marc Bolland left the supermarket to take up the top post at Marks & Spencer and was replaced by Dalton Philips.

In the annual report, the company said: 'While this is an unusual arrangement, the committee considers that the granting of this award is in the long term interest of shareholders and is satisfied that it is appropriate.'

The award vests in two years and is subject to Mr Pennycook's continued employment, while the supermarket's earnings per share growth must meet or exceed growth in the retail price index.

In its most recent alert, Pirc warned: 'The EPS targets attached to this award are not challenging and the restrictive period is not sufficiently long.'

It also said the group's earnings targets attached to a long term incentive plan were 'not sufficiently challenging'.

Pirc has recommended shareholders vote against the remuneration report.

Last month's collapse of Focus DIY was a blow to haulage firm Wincanton, which provided warehousing for the chain at a site at Tamworth.

As part of a three-year deal signed in 2009, Wincanton managed the storage of over 28m cases of DIY products as well as internet fulfilment operations from the warehouse, which served the retailer's 180 stores.

Wincanton posts its full year results on Thursday and will be quizzed about the financial impact of the Focus collapse into administration. The company is expected to post profits of around £34.4m, according to brokers Numis, compared to £34.7m a year earlier.

But the City will focus on the outlook for 2011/12 financial year to see how the company thinks it self-help measures will improve the business. Wincanton, which manages some 8,000 trucks, is rolling out cost-cutting measures, including restructuring its French and UK businesses.

Since announcing plans to restructure in December, the company has sold its recycling business in the UK, while its Britvic operation faces an overhaul which could include job losses.

The company has debts of around £260m, which analysts have warned constrain investment opportunities and need to be dealt with.

Steve Woolf, analyst at brokers Numis, said there was potential for recovery.

He said: 'The UK business remains solid and the new growth sectors have the potential to significantly improve earnings over the medium term. We back the new management to deliver on recovery.'

The company previously said it expected results to be in line with expectations after it renewed several contracts to deliver goods for companies including Tesco, Comet, WH Smith and BP.

The group is also confident of more contract renewals later in the year, adding that it has a healthy pipeline of new business.

The Bank of England's monetary policy committee will announce a decision on whether it plans to change interest rates from a historic low of 0.5%.

Nick Raynor, investment adviser at online broker The Share Centre, commented: 'Andrew Sentance, the Bank of England Monetary Policy Committee's most hawkish member, stepped down from the committee last month, leaving Spencer Dave and Martin Weale as the two remaining members who have been consistently voting for an increase in the rate of interest.

'Although inflation remains stubbornly high (4.5% in April), fears over household finances, and, in particular, concerns over the extent to which increases in average wages are lagging behind inflation, are likely to be sufficient to encourage the bank's rate setting committee to stay its hand.'

RICS will release its latest residential lettings survey. The Office for National Statistics will publish UK trade figures for April.

FRIDAY

The Office for National Statistics is due to release its Index of Production for April and its Producer Price Index for May.