Tesco overtakes Sainsbury in stock market valuation; MARKET REPORT

It was a momentous day in the food retailing sector as Tesco finally replaced arch-rival J Sainsbury as the nation's biggest supermarket by stock market valuation. Tesco, already the leader in terms of market share, is also set to overtake Sainsbury as the country's most profitable superstore

At 313p, down 2p on the day, Tesco's market capitalisation of pounds 6.8bn is now pounds 12m more than Sainsbury, whose shares hit their lowest level since April 1994 after a large institutional investor, said to be SBC Warburg, offloaded 30 million shares via a placing at 347p.

Sentiment was also depressed by sell advice and reduced estimates from two leading brokers. Paul Smiddy at Credit Lyonnais cut his pre-tax forecast for the year to March 1997 from pounds 767m to pounds 718m. He believes that even after the downgrade the rating of 14 times earnings is still too demanding as it clings to the outmoded concept of Sainsbury being the market leader with the strongest brand. He reckons interims due at the end of the month will be "appalling" with profits down 12 per cent at the pre-tax level.

NatWest cut its forecast from pounds 750m to pounds 725m for this year and now looks for pounds 794m (previously pounds 828m) for fiscal 1998. It sees no evidence of a credible marketing strategy emerging to differentiate Sainsbury from its rivals, while like-for-like sales growth is nearer 3 per cent than the industry average of 5.5 per cent.

Worse than expected inflation figures and weak bond markets pushed the FTSE 100 28.1 points lower at one stage, but the index recovered after a mid-morning rally on Wall Street to end 14.6 adrift at 3994.7. Volumes of over 900 million were boosted by placings in Sainsbury and TI, the engineering group.

TI dipped as low as 549.5p before rallying to close a net 8p off at 556.5p in turnover of 98 million shares after German automotive and telecoms giant Mannesmann sold its 8.86 per cent stake for pounds 224m. The 42.1 million shares were placed in the market by UBS, Cazenove and SBC Warburg at 532p.

Endorsed by Princess Diana and Edina and Patsy in the sitcom Absolutely Fabulous, Harvey Nichols has always been the height of fashion among Islington ladies who lunch.

Now the famous Knightsbridge store, whose first regional outlet opens in Leeds next week, is acquiring a stock market chic all of its own.

Floated at 270p in April, its shares have been strong performers, peaking earlier this week at 372.5p. They eased half a penny yesterday to 269.5p but US investment bank Morgan Stanley thinks the stock has further to go.

Analyst Victoria Melendez has just raised her profit forecasts for the group, citing better-than-expected sales and good cost control. Turnover at the flagship Knightsbridge store is likely to have risen by about 14 per cent year-on-year, more than her initial forecast of 9 per cent.

In addition, Harvey Nicks' recently opened Oxo Tower restaurant has become an instant hit and is operating at full capacity.

She now sees Harvey Nichols realising annual compound earnings growth of 27.3 per cent over the next three years and has raised its 12- month price target for the shares from 376p to 400p.

Etam may not be trying to steal a march on Harvey Nicks, but the womenswear retailer wants to shed its Sharon and Tracy image by appealing to a more fashion-conscious customer. To that end, models Jerry Hall and Marie Helvin, ex-Gladiators Sharon (sic) Davies and Diane Udal and actress sisters Lesley and Debbie Ash are being enlisted as part of a pounds 5m revamp.

The news came as Etam unveiled a widening of first-half losses to pounds 5.75m from pounds 3.85m. Nick Bubb at broker Mees Pierson has taken the stock off its sell list and predicts profits of up to pounds 5m in the year to February 1998. The shares added 2p to 157.5p.

Elsewhere in retailing, shares in Manchester-based mail order group N Brown rose 22p to 421p after posting another set of strong results.

Composite insurer Commercial Union led the list of best Footsie performers, rising 19p to 645p after broker BZW said the shares could be worth 800p in a rerating of the life sector. Cazenove, Lehman Brothers and Goldman Sachs are also buyers off the stock. Guardian Royal Exchange also benefited, firming 7p to 265p, as did General Accident, up 6.5p to 725p.

As flagged here yesterday, Albert Fisher completed the sale of its US distribution business for a better-than-expected pounds 73.5m, but the shares fell 1.25p to 39.5p.