The Investment Column: It's pricey but GUS still has upside

It's worth sticking with Whittard of Chelsea; Recovering Incepta is worth holding on to
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The Independent Online

There is something of a revolution going on at GUS. Bit by bit the group is waking up to the revelation that conglomerates went out of fashion at about the same time as ra-ra skirts.

There is something of a revolution going on at GUS. Bit by bit the group is waking up to the revelation that conglomerates went out of fashion at about the same time as ra-ra skirts.

It cut Burberry, the luxury goods brand, free some time ago, and repeated the trick in South Africa this month with its Lewis retailing business. Okay, so it still owns big stakes in both but Burberry has a much higher profile ­ and rating ­ now Rose Marie Bravo is her own boss.

The big question is when will GUS follow suit with Experian, its financial and marketing services business? For now, the division still rubs shoulders with Argos, the catalogue retailer, and Homebase, the home improvement chain. As yesterday's first-half trading update shows, the three make pretty handy bedfellows.

But GUS raised hopes that its days as a conglomerate could be numbered when it launched a strategic review earlier this year. The City was quick to factor in a demerger of Experian, which delivered its fifth consecutive period of half-year growth, re-rating GUS's shares accordingly.

For now, though, each of its businesses is firing on all cylinders. Argos shrugged off what other retailers called a tough summer, to report a 7 per cent rise in underlying sales for the six months to 30 September. A slight slowdown, but twice as fast as the market. Growth came from its new Argos Extra catalogue and its home delivery services, which contributed a quarter of the chain's sales. And from Argos's temptingly low prices. GUS, which runs Argos and Homebase from one combined back office, reinvests all its supply chain gains in lower prices. At Homebase, underlying sales rose 4 per cent, while Experian saw global sales at actual exchange rates up 7 per cent.

GUS was this column's star retail pick of 2004 ­ and its shares are up nearly 20 per cent so far. At 890p, down 7.5p, they are not cheap, but there is still upside. Buy.

It's worth sticking with Whittard of Chelsea

Tea bags from Whittard of Chelsea, the tea and coffee retailer, are not quite Fortnum & Mason. But they do command a higher premium than PG Tips and sales to its loyal customer base, who see Whittard as a niche, reasonably upmarket brand, have been growing.

It has been looking to expand into the US, and said yesterday a substantial order produced for a US retail group has gone down so well, the Americans have asked for further products.

And there is still room for expansion in the UK and a trading statement yesterday said progress was being made. The company has been piloting a larger store format, offering more ceramic goods than its traditional high street outlets. These have proved popular and Whittard has also tied up with Lindt, the chocolate group, to create combined outlets. Two shops have opened since the start of the year and nine are planned in the next two months. Its 114 UK stores could soon grow to 200.

Profits have been growing steadily, from £1m in 2002 to a forecast of more than £4m in 2005. At 201p, the shares trade at about 17 times earnings. Not cheap, but the potential earnings growth over the next two years, means the shares should be kept on the boil. Hold.

Recovering Incepta is worth holding on to

It's been a long haul but Incepta, the PR and marketing group, was finally able to report growth. Along with others in the media industry, the company has been through three years of contraction, as clients slashed expenditure and one-off business, such as work on deals, dried up.

The good times are not exactly back but yesterday's interim results showed revenues expanding 3 per cent and operating profit grew 12 per cent ­ demonstrating the operational gearing in the business.

After slashing costs to survive the downturn, companies are beginning to spend again to try to generate top-line growth. According to Incepta's chief executive, Richard Nichols, companies are relying increasingly on the less glamorous end of marketing ­ activities such as mailshots, provided by Incepta ­ to target their message to the right consumer. This is what is known in the industry as a shift from "above the line" spend to "below the line".

With fragmentation of mass media, especially television, corporations such as Unilever have to find alternative ways to market their goods.

In PR, where the company's assets include Citigate, the top City spin doctor, operating margins were up and the company is winning new business. The quality of the City PR is improving, in the sense that more of the turnover is coming from retained business rather than working on one-off projects, Mr Nichols said.

However, Incepta's fortunes are tied to the ebb and flow of the City and broader economy to a large extent and the recovery we have seen is pretty fragile, with major negative factors still to contend with, such as the high oil price. At 72p, the shares are a hold.