The Investment Column: It's time to take profits at Matalan

Penna Consulting worth putting your pennies on - McBride comes out of the wash looking shiny
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The Independent Online

For a cheap-and-cheerful retailer, Matalan has been decidedly pricey and miserable of late. The supermarket giants' march into the discount clothing sector stole Matalan's thunder on value, while it rained on its own parade last Christmas, with a profit warning either side of the festive season.

For a cheap-and-cheerful retailer, Matalan has been decidedly pricey and miserable of late. The supermarket giants' march into the discount clothing sector stole Matalan's thunder on value, while it rained on its own parade last Christmas, with a profit warning either side of the festive season.

Underlying sales fell last year for the first time in its six-year history as a quoted company, prompting bidders to start circling. The days of its stock market stardom, when it was regularly reporting underlying double-digit sales growth, seemed a distant memory. Yet under a new chief executive, John King, the group seems to have found its feet again.

All three divisions - womenswear, menswear and homewares - grew sales by 4.6 per cent during the past nine weeks. A successful new distribution centre means stock availability has improved and the group's first refurbishment programme since its first store opened nearly 20 years ago is under way.

Interim profits were flat, knocked by a poor performance from Lee Cooper, but hopefully this business will soon be sold.

The next six weeks will determine whether Matalan hits the market's forecast of £85m pre-tax profits. Matalan has managed to cut prices by about 5 per cent across the board over the past six months, so shoppers should actually find the Christmas bargains they will be hunting out at its 183 out-of-town stores.

Mr King hopes to avoid last January's self-induced profit meltdown by having sales to clear stock as he goes. But simply boosting sales by cutting prices doesn't necessarily do much for the bottom line. Profit progress will only come if margins recover and the group weans shoppers away from its cheapest products. Matalan has yet to definitively prove it can sustain a recovery amid fierce competition for the value clothing pound.

The group was one of our retail picks of the year at 169.75p in January, and the shares have since risen strongly. With so much riding on Christmas, it would be wise to take profits.

Penna Consulting worth putting your pennies on

Penna Consulting is a recruitment company which does better when corporate Britain is firing rather than hiring.

This is because its main operations, accounting for about half the business, are in "outplacement", where companies pay for retraining and jobhunting advice for staff they are making redundant. Revenues from this business were down by a third in the six months ended September. The hope now is that a nascent economic optimism will lead companies to conduct mergers and acquisitions where the subsequent restructuring will provide Penna with lucrative work. In the meanwhile, though, Penna has to modernise its outplacement business. This has been slow to spot that users no longer want to come to local centres to hunt for jobs, but would rather access services through broadband at home. Penna has to shut half its local centres and invest in IT, which is why it has scrapped its dividend for the year.

So the short-term view is pretty cloudy, but bold, long-term investors might want to focus on Penna's strong reputation in the industry (with 60 per cent of the FTSE 100 as clients). Speculators might focus on the presence on the share register of a former chief executive whose plans are unclear. Have a punt.

McBride comes out of the wash looking shiny

Unlike the giants of the household goods sector, such as Reckitt Benckiser, the Buckinghamshire-based McBride shuns the spotlight. Not for it the battle of the megabrands in dishwashing, cleaning or air freshening. It is the manufacturer behind supermarket own-label products such as Asda toothpaste, Tesco washing powder and Sainsbury's bleach.

Obviously these are not products retailing at a premium price. Indeed, they are often the shock troops of the supermarket price wars, and McBride must be content to supply them at very low cost to the mighty grocers. One might have feared that the rising costs of raw materials (mainly linked to oil, but also caused by other rising commodity prices) would sink profitability at McBride. So yesterday's insistence that it is trading in line with expectations was welcomed, as was the company's promise that it is seeking new cost savings from manufacturing rejigs and squeezing its own suppliers.

The growth potential here continues to be on the Continent, where supermarket own-label is only in its infancy as a market. We advised holding the shares at 114.5p last year. At 148p, on 10 times next year's earnings and with a 3.2 per cent dividend, it is still fairly priced.

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