LONDON MARKETS: M&S Slumps; Uninspired FTSE Ends Up 0.1%

By Steve Goldstein

The air continued to come out of Marks & Spencer shares on Wednesday as the clothing and food retailer reported weaker-than-expected sales.

Marks & Spencer shares slid 6.8% after the U.K. clothing retailer said comparable U.K. sales for the 13 weeks to Dec. 26 rose 0.8% from a year earlier, missing consensus expectations for a 1.2% advance.

The company said that after adjusting for the timing of its Christmas sale this fiscal year, which started on Dec. 27, comparable sales were up nearly 2%. M&S, like Next on Tuesday, was cautious going forward.

Analysts weren't scathing toward the company but found better alternatives.

"While a return to positive [comparable] sales growth is encouraging and comparing numbers with others is complicated by timing issues and definitional differences, it appears as if M&S has had a respectable Christmas and not as spectacular as others," said Kate Calvert, an analyst at Shore Capital.

"We continue to believe that there are structural and operational issues which may hold back a recovery and result in continued industry underperformance while management addresses them."

Seymour Pierce analyst Kate Heseltine cut her rating on M&S to hold from buy, citing the 10% gain in M&S stock since late October.

Also in retail, J Sainsbury dropped 0.6% ahead of the supermarket's update on Thursday.

Tesco fell 2% as Jefferies International downgraded it to hold from buy Wednesday, citing valuation and saying that a more aggressive price target is prevented by the continued U.K. sales lag and the reduced likelihood of future U.K. margin gains.

More broadly, the U.K. FTSE 100 gained 0.1% to 5,530.04.

The British pound (CUR_GBPUSD) changed hands at $1.5947, down 0.2%.

Elsewhere in London, Petrofac lost 2.5% as Morgan Stanley cut the oil-services firm to underweight from equal-weight, saying it will struggle to surprise positively and valuation is demanding.

The Royal Bank of Scotland (RBS) rose 3.6%, extending recent sharp gains.

Exane BNP Paribas, which upgraded the bank on the first day of the year, said the Edinburgh lender should act now to buy back or convert 14.1 billion pounds of preference shares and Tier 1 securities where it's not paying coupons for two years due to European Commission rules.

U.K. infrastructure software group Autonomy gained 6.1% as it said it's expecting 2009 results in line with consensus estimates. It forecast adjusted earnings per share of 97 cents on revenue of $740 million.

Outside the FTSE 100, Games Workshop jumped 30.4% as the maker of The Lord of the Rings strategy battle game said pretax profit in the year to May 30 will be 5 million pounds ahead of market expectations, citing "satisfactory" sales in December, improving gross margins and cost control.

Biotech group Henderson Morley lost 13.8%. It said negotiations for a potential purchase of its ICVT human technologies have been extended for another 60 days though it believes "we remain on course to achieve the divestment within this period." In the first half to Oct. 31, the company's available cash fell to 94,717 pounds from 203,786 pounds.