Retailers are in the spotlight, with a sacking, a stellar performance and a winter clothing disappointment.
Supermarket group Morrisons has jumped 8.4p or nearly 5% to 185.3p after it dispensed with the services of chief executive Dalton Philips after weak Christmas trading. The company said like for like sales excluding fuel fell 3.1% in the six weeks to 4 January.
The news also gave a lift to Tesco, up 7.1p to 211.65p, and J Sainsbury, 7.9p better at 248.2p.
But Debenhams has plunged 5.85p or almost 8% to 69.2p as it revealed a 0.8% drop in first quarter underlying sales, compared to expectations of a 1% increase. A strong Christmas performance, with sales up 4.9% in the four weeks to 10 January, was not enough to make up for a lack of demand for winter clothes amid the mild autumn weather.
It said weak clothing demand and sales of low-margin items meant a full year rise in gross margins would be at the lower end of its 0.1% to 0.4% forecast. Kate Calvert at Investec said:
Trading and gross margin over the 19 weeks were weaker than expected resulting in a nudge down in forecasts. While it is encouraging that management stuck to its new trading stance with 10 fewer days on promotion, we continue to believe that Debenhams is strategically challenged and needs to reinvest further gross margin opportunity back into the offer. While the valuation is undemanding, we see little potential for a medium term profit recovery. Downgrade to sell [from hold]. Target price retained at 66p.
But Asos has added 153p to £25.80 on news that strong demand over Christmas lifted sales by 15% in the six weeks to 9 January, compared to 8% growth in the previous three months.
The company had a difficult 2014, with a warehouse fire and three profit warnings, partly due to the strength of the pound hitting profits at its overseas operations. Analysts at Jefferies said:
One does not need to make too much of just six weeks, but there is a clear acceleration in momentum, senior management commentary is positive and Asos continues to develop the model well as it puts 2014 to bed.
Overall, the FTSE 100 is up 21.13 points at 6522.55, gaining further ground from its early rises following news that inflation came in much lower than expected at 0.5%. One of the main factors is the recent slide in oil prices, with Brent crude down another 3.6% to $45.69.
So oil companies are inevitably among the main fallers. Tullow Oil is down 10.9p to 376p while Weir, the pumps group which supplies the sector, is off 59p at £16.64.
Elsewhere ITV, hit on Monday by a sell note from Berenberg, has recovered 6.9p to 219.4p. Investec has cut its price target from 236p to 210p but Bernstein raised its forecast from 220p to 250p. Bernstein said:
The UK market will likely perform better than its continental counterparts, valuation is inexpensive and the company carries a “free” option around M&A. Longer term, even a partial deregulation of the many rules still hampering the business can only make it more attractive (even if we remain sceptical on the feasibility of introducing retransmission fees).
Despite falling energy prices and pressure to cut charges to consumers, British Gas owner Centrica has climbed 10p to 271p after Morgan Stanley upgraded from neutral to overweight. The bank said:
At Centrica, we see substantial room for improvement in earnings per share driven by cost reductions. Our analysis suggests that just by moving to best in class cost to serve, Centrica has scope to reduce costs by £267m. Moving to best in class on cost to serve in the retail energy business could boost earnings per share by more than 20%. Presumably this would take 2-3 years to deliver. This is especially important given the scrutiny from the Competition and Markets Authority. Given its scale, we think Centrica could be leaner. There is also scope for new technology to reduce costs in some businesses. Cost reductions are not new to Centrica, but we believe there is scope to do much, much more. The onus falls on the new chief executive (started 1 January 2015) – Ian Conn, who has been a senior BP director for 10 years.
With a dividend yield of 6.7%, Centrica is clearly discounting a material risk of a dividend cut – we think this is unlikely...the dividend is amply covered by cash, even in our bear case, thus we think an assumption of a dividend cut is too pessimistic. We upgrade Centrica to overweight as we see the risk-reward now skewed to the upside, even in the weak commodity environment.
