Signs of the times: hard facts from two business giants

By Russell Lynch and Matt Dickinson, PA
Wednesday, 2 July 2008

Two major announcements - from retail giant Marks & Spencer and Britian's biggest house builder Taylor Wimpey - raised fears today that the UK is heading for full-blown recession.

M&S has been bucking the downward trend, but warned today that consumer confidence "deteriorated markedly" in the first three months of its financial year.

And embattled housebuilder Taylor Wimpey today confirmed it was axing 900 jobs to help cope with a "significant downturn" in business.

Both saw their share prices fall, with M&S suffering an early 20pc drop and Taylor Wimpey plummeting about 50 per cent.

M&S said 0verall UK like-for-like sales fell 5.3 per cent in the 13 weeks to June 28 amid the tough high street conditions.

M&S posted profits of £1 billion last year but chief executive Sir Stuart Rose said: "At our preliminary results in May, we reported a mixed start to our 2008/9 financial year and expressed caution about consumer sentiment.

"Since then, consumer confidence levels have deteriorated markedly and market conditions have become more challenging."

The director of M&S's food business, Steven Esom, is also leaving the business with "immediate effect", the group said.

The surprise update from M&S - around a week earlier than expected by the market - amounted to a profits warning from the group in a worsening retail climate.

The sharp decline seen since March compares with a 1.7 per cent like-for-like sales fall in the first three months of 2008.

Sir Stuart said the current slowdown was the "third dab of the brakes" seen since last November. The City currently expects profits of around £870 million but analysts are likely to lower their forecasts following the vote.

M&S has around 21 million customers every week but the chief executive said the economy was in a "very uncomfortable place" with pressures on consumers from factors such as rising energy bills.

"Everybody is going to have to swallow hard and cut our cloth accordingly," Sir Stuart said.

General merchandise sales have been hit by the tough market conditions, down 6.2 per cent on a same-store basis, although the group said it had managed to hold its share in the clothing market.

But food sales - down 4.5 per cent like-for-like - have seen a "significantly weaker" performance due to the pressure on consumer spending and increased competition, the group said.

The sudden departure of Mr Esom - who joined just over a year ago - came because the company wants to "increase the pace of change" in the food business. In May M&S announced initiatives such as pilots to sell branded food favourites such as Marmite and Heinz baked beans for the first time.

"We want to make sure that our business is fully equipped to meet the downturn, which is going to be longer and more hard-fought than first anticipated," Sir Stuart said.

M&S's shares slumped 17 per cent in early trading today as analysts voiced their fears over the company's prospects and disappointment that the group's recent investment in its stores had had little effect.

Seymour Pierce analyst Freddie George said: "We are reiterating our sell recommendation. There will inevitably be downgrades after this announcement.

"After these figures, concerns will grow (over) the strategy on food and the refurbishment programme, and the high debt levels of the group."

Taylor Wimpey, which announced it has so far failed in a major fun-raising effort, also saw an even more dramatic fall in its share price - by 50 per cent in early trading.

The housebuilder said it was closing 13 regional offices and reducing general staffing levels after suffering a "sharp" decline in reservations since April.

Net reservations for private housing during the six months to June 29 were 45 per cent lower than prior year, the firm said.

Taylor Wimpey - which is in the process of trying to raise a reported £500 million to help shore up its finances - said it was now concentrating on reducing costs and cutting the prices of built homes to improve cashflow.

The firm said: "Our major markets are experiencing a significant downturn, characterised by significantly lower weekly sales rates and lower average selling prices than in recent years. We expect that the UK housing market will remain weak at least through 2008 and we do not anticipate any recovery in the short-term."

Taylor Wimpey also revealed that group finance director Peter Johnson was stepping down at the end of this year.

It is understood the redundancies will be complete by the end of September this year. The job and office cuts - which have been made across the UK - will save the group £45 million a year, the firm said.

Taylor Wimpey - which was formed from the merger of George Wimpey and Taylor Woodrow last summer - said total housing completions in the first half of this year were around one third lower than for the comparable period in 2007. The group reported 12,228 completions for the first half of last year.

Its order book was also 33 per cent lower with average selling prices down around 8 per cent.

Taylor Wimpey said it expected to write off £550 million from the value of its land bank and work-in-progress this year - about 11 per cent of its gross UK inventories.

The firm added that it remained "in full compliance" with its banking covenants, but warned that without an amendment "in certain negative market scenarios we might breach one or more banking covenants at the first testing date in 2009".

"We decided it would be prudent to agree a revised banking facility with our core lending banks conditional on raising further equity," it went on.

Referring to the capital raising attempts, Taylor Wimpey said: "In light of current market conditions we have not been able to conclude a satisfactory transaction."

The firm's gloomy update comes as the Royal Institute for Chartered Surveyors said new home building was falling at the fastest pace since 1995.