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Weekly commentary

Weekly commentary

Economy: The era of fiscal prudence under the Clinton Administration is more than likely coming to an end.

The US government has retired US$450b in debt over the past four years.

Irrespective of which party wins the US election, fiscal spending will rise, potentially having implications for US interest rate policy settings.

The big issues for 2001 will be the combination of high energy costs, political uncertainty and relative high interest rates eroding consumer confidence and slow the economy further.

Equities: US equity markets were again volatile over the week awaiting the outcome of the US election.

Stock rotation continues to dominate the market on thin volume, with investors concerned about the earnings growth of high P/E growth stocks including computer related and telecommunication shares.

Locally, a similar trend is being established as investors continue to sell stocks that disappoint on earnings forecasts.

News Corp & Brambles were two companies that disappointed the markets last week, both saying they won’t be able to maintain earnings growth going forward.

Investors continue to look for shelter in defensive stocks with strong performances from the Gaming, Banking & Utility sectors.

Optus reported to market expectations, however this was overlooked by the speculation the company is on the verge of being broken up. Meanwhile Wesfarmers reported s strong first quarter result up 48 per cent from the corresponding period last year. ERG continues to excite the market in winning another two contracts in France and New Zealand. The market is still awaiting the outcome of the $200million contract in Sydney.

Sales growth likely

Coles Myer Limited

CML have reported sales growth of 5.2% for the October quarter.

While this is the lowest quarterly growth number since January 1997, we suggest it will prove to be above market growth (which has been impacted by the GST, Olympics and higher rates).

September quarter sales as reported by the ABS rose only 3.0%.

Food continues strong; Given very little impact from GST (positive if anything), CML supermarket sales growth continued strong at 7.4%.

This compares to market growth of 4.8% for the September quarter, implying further market share gains.

While below WOW’s September quarter growth (9.3% excluding petrol), both players continue to take market share.

Myer impacted by GST and Olympics; Myer sales growth declined 2.4% over the quarter, the lowest since April 1997 (-5.4%).

The result was clearly impacted by the implementation of the GST and disruption over the Olympics, but a little disappointing. A high Q100 base (+10.6%) compounded the decline. We have downgraded our full year Myer EBIT forecasts due to an adverse margin mix and low sales.

Other divisions; We estimate Target achieved 1.0% like store growth, an improvement on the 5.4% decline over FY2000. With Officeworks achieving double digit sales growth, we suggest Kmart achieved 2-3% sales growth. Katies continued to bleed, but has been sold.

Fifth quarter of market gains

David Jones

We estimate DJS first quarter sales excluding Aherns rose 9.0%, well above market and major competitor Myer Grace Bros (down 2.4% over the same period). Like store growth was 2.7%, a good number considering the tough retail market, new store openings and strong Q100 base (like sales up 6.5%). Total sales growth including Aherns rose 15.7%.

Mix encouraging; Management has stated they are extremely pleased with apparel trading over the quarter, the key margin driver for the group.

This augurs well for profitability, although Christmas remains the key margin driver. Sales on the groups credits rose to 42% of total sales, again likely to lower merchant fees and boost interest income.

Olympics a net positive; We suggest with 60% of total sales from NSW and around 17% of total sales from the Sydney CBD store, DJS were a net beneficiary from the Olympics.

That said, late-night, weekend and suburban shopping were all negatives during the Olympic period.

No change to earnings; The Q101 sales number was dead in-line with our forecast, and we see no risk to our current forecasts.

It should be noted our FY2001 earnings include a loss of $8.8m from food and ecommerce, but on the positive side include $5.2m EBIT from Aherns (which lost $0.8m in H200).

We suggest 13% EPS growth would prove exceptional in the current market environment.

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