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*** Gloom in the retail sector…dressing like your daughte *** Profit warnings point to a recession
*** FTSE is set to slump…but Russia's looking up…and more
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- Ouch. Shareholders in Woolworths suffered a nasty blow yesterday after private equity group Apax Partners unexpectedly dropped its proposed $837m takeover offer for the sweets-to-DVDs retailer. The shares slumped by 25% to their pre-bid level around 40p.
- Apax, which has been looking at Woolworth's books, wasn't entirely clear on why it had pulled out, mumbling something about being unable to 'confirm certain key cash items' in the accounts. Analysts speculated that there may have been some unseen costs related to plans to sell off Woolworths's remaining supersize Big W stores.
- But a more likely explanation, reckons stockbroking group Seymour Pierce, is that 'Apax got cold feet having seen the current state of the retail market'.
- You can't blame them. Just look at Woolworth's current trading: like-for-like sales fell by 3% in the 10 weeks since January 31. And it's hardly alone. Yesterday Austin Reed announced that same-store sales have slipped by 6% in the 10 weeks since January 31. While the Austin Reed brand is holding up well, the traditional womenswear arm Country Casuals is struggling: 'women in their 40s used to start dressing like their mothers; nowadays they're more likely to want to look like their daughters', said chief executive Nick Hollingworth.
- Nobody wants to look at Laura Ashley at the moment: the group, which grew profits by 55% last year, reported a 13.9% slide in like-for-like sales over the past 10 weeks, and FTSE heavyweight GUS piled on the gloom with the news that its catalogue stores chain Argos failed to boost underlying sales in the last six months - the first time this has happened in six years. And earlier this week, JJB Sports chairman David Whelan, having announced a 30% slide in operating profits last year, said that trading conditions were as difficult as any he'd known for several years.
- Given all this, it's no surprise that the general retailing sector had a bad day, losing 1.51%. The steel industry did worst, however, as news that US steel demand was slowing wiped 5% off FTSE 100 member Corus and almost as much off the overall sector. Meanwhile, worries that metals prices may have peaked dented BHP Blliton and Rio Tinto, while Rolls Royce was the top blue chip gainer, rising by 3.4% after an encouraging profits forecast. The FTSE 100 finally closed down 0.3% at 4,945, while Woolworths ensured that the FTSE 250, the mid-cap index, finished 1.1% in the red at 7,163.
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- Things don't look likely to improve on the retail front anytime soon. Indebted consumers are grappling with sliding house prices and five interest rate rises in the past eighteen months. And there may be more to come now that wage inflation is making a comeback. Moreover, the IMF has warned that public spending would have to fall or taxes rise if Gordon Brown is to meet his budget rules. With the government reluctant to cut spending, a 3.5p hike on the basic rate of income tax is a distinct possibility. By this time next year, our wallets will be emptier than a hermit's address book.
- The rapidly cooling retail sector helps explain why profit warnings from listed UK companies jumped by 20% year-on-year to 85 in the first quarter. Media companies were also major culprits. That's an ominous sign: according to Ernst & Young, weakness in these sectors is typically an early harbinger of a recession.
- Keep a close eye on transport and logistics groups this quarter; if they start warning, UK plc will be in for a 'rough ride', says Tom Burton of the accountancy group.
- The likelihood of a recession next year, along with the market's tendency to retrace half of a previous upswing, presages a 20% slide in the FTSE between late May 2005 and October 2006, reckons Robin Griffiths of Rathbones. One of the most widely heeded technical analysts in the City, he thinks the index will peak at about 5,250 in a few weeks' time, and then plateau for a while before slumping to 4,000, negating half the advance since March 2003.
- Sounds nasty. But as latest MoneyWeek notes, a fall or a rise of above 10% is far more likely statistically in any given year than the modest climbs under 10% pencilled in by most strategists this year and next. And long-term stock market history also suggests that the post-bubble pain isn't over.
- So if the FTSE is a no-go zone, where else might be worth a look? Well, how about Russia? This week's jitters over another back-tax bill for BP's joint-venture partner TNK look overdone as it wasn't entirely unexpected; this is hardly another Yukos, according to Steven Dashevsky of Aton brokers. For other reasons why things are looking up in Russia, see the latest MoneyWeek, arriving on subscribers' doormats this morning.
- Also in the magazine: how to tap into the couch potato market, why the City could turn blue on 5 May, and why Ruth Rendell thinks she's a wonderful catch.
Your locum correspondent, signing off until MondaAndrew van Sickle.
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