Analyst in warning over slump in growth at Tesco

Dec 1 2008 by Our Correspondent, Western Mail

A VIEW of consumer confidence in the run-up to Christmas will be revealed this week with trading updates from the supermarket and travel sectors.

Supermarkets will be back in the spotlight as market leader Tesco and UK number four Morrisons both give their latest snapshots on trading.

Tesco’s numbers, due tomorrow, should update on the progress of its new discount range, launched to take on the likes of Aldi and Lidl in September.

Chief executive Sir Terry Leahy’s comments on the outlook will also be closely watched, as well as any signs the retail behemoth is trimming its long-standing 3-4% UK sales guidance.

Shore Capital analyst Clive Black has claimed Tesco was internally budgeting for UK sales growth of just 2%, although the company dismissed his comments.

Mr Black still has a “buy” rating on the grocer – as Tesco is asset-rich and any turbulence suffered will be put into perspective by greater damage elsewhere.

But he has nudged down forecasts to reflect the economic storm clouds: “Fear and prudence are the mindset, with the damage moving from the news headlines to the real economy, reflected by rising unemployment and severely curtailed economic activity.”

Morrisons, which updates on Thursday, said its value ranges had helped it bring in half a million more customers every week as hard-pressed shoppers looked to cut food bills.

The firm, which relaunched cheaper lines and slashed prices on several everyday items to 50p, saw like-for-like sales, excluding fuel, rise 7.6% in the 26 weeks to August 3.

Royal Bank of Scotland analyst Justin Scarborough said Morrisons could post like- for-like sales close to 7% for the third quarter.

“We expect sales trends to be robust, and possibly ahead of what we have been modelling for many months. Clever promotions along with clear marketing are helping to drive footfall and loyalty,” he said.

Voucher and savings club Park, which posts interim profits tomorrow, has been a beneficiary of a weakening economy as cautious customers put aside Christmas cash more than a year in advance

The Birkenhead-based group said in its last update that it had already begun to take orders for Christmas 2009, in “a very encouraging sign for the future”.

Park has more than 440,000 customers and 102,000 agents, allowing savers to spread the cost of Christmas hampers and other goods through monthly payments.

Chairman Peter Johnson said: “The very nature of our business is to help customers save efficiently, a prudent trend in the current economic climate.”

The September trading update also underlined the group’s continued recovery from the high-profile collapse of rival Farepak in 2006.

This shook confidence in the Christmas savings sector and halved Park’s pre-tax profits to £5.2m in the year to March 31. But Park has also benefited from investment in improved websites since then.

Hardman & Co analyst Roger Hardman expects profits to recover to £6.4m this year, although there are question marks over the interest it will earn on its hefty cash balances as rates fall.

But he added: “The customers who started Christmas savings schemes with the company in February-March have clearly continued with them in spite of the financial pressures that wider economic conditions have brought.”

Transport group Stagecoach has taken recent stock market punishment amid warnings of slowing rail revenues.

The Perth-based firm’s shares have fallen almost 50% since September as investors bailed out of a stock previously believed to be a defensive banker in a recession.

Stagecoach, which operates the East Midland and South West Trains franchises, believes its business will be “relatively resilient” in a downturn, although rail growth has slowed to 8.3% in the past six months from 13.6% in the year to April.

The City will again focus on the outlook when it publishes interim results on Wednesday. Stagecoach is currently expected to post a 15% rise in profits to £201m over the full year.

Charles Stanley analyst Tony Shepard said: “Unfortunately, the timing of the economic slowdown is a worry because Stagecoach needs continuing strong revenue growth to maintain rail profitability as the rail subsidy declines sharply over coming years.”

Stagecoach is ready to implement cost savings in its rail businesses “if and when appropriate”, but its bus operation is looking healthy.

Around two million UK passengers travel on Stagecoach buses every day in 100 towns and cities in the UK. The firm has a fleet of around 7,000 buses.

Stagecoach said it was likely that higher motoring costs and other expenses were prompting more people to use its services.

“Stagecoach has a very strong, recession-resistant business in UK Buses. This business continues to trade strongly with like-for-like growth in revenue and passenger volumes,” Mr Shepard added.

Software group Sage is likely to warn over the impact of a worsening economic outlook in full-year results on Wednesday. Its last update in August described market conditions as “uncertain and challenging”, although it stuck to full-year guidance.

The Newcastle-based firm saw “satisfactory” trading in the UK and US, and slower growth in Spain – although better conditions in Germany, Switzerland and France helped it progress in mainland Europe.

But since then the collapse of Lehman Brothers and the intensification of the financial crisis has made the business climate even more fraught. The eurozone has officially entered recession and the UK is set to follow in January.

Sage, which specialises in software such as accountancy packages for businesses, has also been dogged by operational problems in its US healthcare business.

This has seen management changes as well as disruption from new legislation regulating the processing of health insurance claims.

Analysts are predicting pre-tax profits of £277m for the year to September 30, a 5% rise on the previous year in constant currency terms.