Allders struggles on weak legs

THE INVESTMENT COLUMN

This has been a tough year for all retailers, but Allders seems to have struggled more than most. Its two-pronged approach to retailing, with department stores on the one hand and duty-free shops on the other was supposed to be a strength. Instead, weaknesses have emerged in both legs.

Department stores have been hit by weak consumer demand and the blazing summer.

The duty-free business is suffering from high opening costs and uncertainties over the European Union's approach to duty-free shoppping.

The performance of the shares tells the story. Allders' shares were priced at 170p when they were floated two years ago. After peaking at 243p this May, they have been on the slide ever since. Yesterday they fell a further 21p to a record low of 168p.

Results for the year to September compounded the gloom. Pre-tax profits were down 8 per cent to pounds 23.5m on sales that were up 13 per cent to pounds 828m, although exceptional items cloud the picture somewhat.

Last year's figures included a pounds 1.5m gain from property disposals. This year's are dented by a pounds 1.1m cost relating mainly to the cost of opening new duty-free outlets in Copenhagen and Paris.

But the underlying position is uncertain at best. True, the department stores pushed up profits to pounds 15.3m and like-for-like sales grew by around 2.5 per cent.

However, most of this gain is thought to have come from the flagship store in Croydon where building work in the surrounding shopping centre has now finished.

The rest of the chain is thought to be treading water.

The margin has also weakened due to a shift in the sales mix towards lower-margin goods such as perfumes and multi-media PCs.

The duty-free business has different problems. It is faced with the possible end of duty-free shopping in the European Union by 1999. Some 40 per cent of Allders' duty-free sales are in the EU, though half of this is in goods such as perfumes and cosmetics which are less affected.

Allders has also suffered from a pounds 1m drop in incentive payments from BAA in its UK airports. This related to turnovers targets set by the airports operator which were higher this year.

With analysts forecasting profits of pounds 22.5m for this year the shares are on a forward rating of 12.

This is a discount to the sector but with risks such as the EU duty-free ruling hanging over the stock, there is better value elsewhere.

Airtours suffers

from sunburn

The big question facing the tour operators who have slashed next year's holiday capacity by a quarter to 8.5 million is whether they have done enough. All depends on the key January to March booking season and the indicators, so far, suggest further cuts will be necessary.

Airtours' annual results yesterday showed a nasty dose of sunburn from this summer's season. Pre-tax profits dropped from pounds 75.8m to pounds 59m. But for a full year's inclusion of a healthy pounds 25.2m from the acquired Scandinavia operations, the figures would have appeared even more dreadful.

The fact that the shares yesterday jumped 22p to 358p owes much to the results being at the top of a pessimistic range of forecasts, and because there were no additional surprises following the recent profits warning. The shares have underperformed the market by 35 per cent this year.

Airtours' underlying bookings from the UK are currently down 25 per cent. Brochure prices have been increased, but by only enough to put them on a par with the cost of holidays sold in 1993.

What Airtours hopes, as do Thomson and First Choice, is that supply and demand will be equalised by the time school holidays start next summer to prevent a repeat of this year's giveaway of packages at below cost.

The giveaway was all too evident in Airtours' results, with profit per passenger crashing from pounds 19.85 to pounds 9.37 - equal to a drop in margin from 7.9 to 3.5 per cent.

While few in the industry dispute that this year is going to prove another big test, Airtours does have financial strength and additional earnings streams from Scandinaiva and now Canada to see it over the worst problems. The cash pile at the year-end totalled pounds 305m, four times debt.

Analysts' forecasts vary greatly for the current year, starting at pounds 65m pre-tax and rising towards pounds 80m. The consensus p/e is a lowly 8.2 but, given that interest rates are likely to fall soon, the share price is well supported by a gross yield of 5.2 per cent on assumptions of a 15p dividend this year.

Yield underpins

Kenwood

On the face of it these looked to be a good set of interim figures from Kenwood, the electrical appliance maker, with pre-tax profits a useful 24 per cent higher at pounds 7.4m (pounds 5.95m). But the shares, which have been in steady retreat since the beginning of last year, slipped a further 2p to 229p, well below both the peak of 381p and the 1992 flotation price of 285p.

The market's worries, given a sizeable boost when former chief executive Tim Parker headed for the exit in October to run Clark the shoe maker, are justified. Kenwood has a number of intractable problems.

Its core UK food processor market is mature and highly susceptible to squeezes on disposable income. Raw materials are a further concern, accounting for 5 or 6 per cent of sales value and subject to often violent swings. Finally borrowings, representing 75 per cent of shareholders' funds at the half-way stage, leave little flexibility.

But Kenwood also has a number of advantages over its competitors. Its focus on achieving a low-cost manufacturing base has a good lead through a factory in China, which is currently working flat out to satisfy demand both from Kenwood and Japanese companies hit by the strong yen and attracted by the increasing quality of Chinese products.

The company is tackling the static food processor market by launching a steady stream of new products, such as travel irons, air conditioning units, rice cookers and espresso machines. And overseas there are still plenty of opportunities in markets where Kenwood is competing head-on with high-cost domestic manufacturers.

The balance betwen those pros and cons will determine whether you think a prospective price/earnings ratio of under 10 for the year to March, when profits of around pounds 16m are likely, is fair or not. With a prospective yield of 5.5 per cent the shares are probably fairly underpinned.