The Investment Column: Leave Matalan off the shopping list

Click to follow
The Independent Online

High Street quality at half the price. That is the sales pitch at Matalan, the out-of-town discount clothing and homewares retailer. The reality this time last year was sub-high street quality at about a tenth of the price, as the stores reduced, reduced and again reduced to clear all the unsold winter collections.

High Street quality at half the price. That is the sales pitch at Matalan, the out-of-town discount clothing and homewares retailer. The reality this time last year was sub-high street quality at about a tenth of the price, as the stores reduced, reduced and again reduced to clear all the unsold winter collections.

Because last year was such a disaster, the management team (then too new to change the buying decisions of its predecessor) had a relatively straightforward task to improve sales over Christmas 2004. And improve they have, up 5.3 per cent in the 10 weeks to 8 January at the stores that are directly comparable. This despite price deflation across the product ranges, especially in clothing.

There was much talk after yesterday's trading update of the improvement in gross margins, in effect the mark-up on goods. So far this is barely improved on a year ago, despite the promise that, for the six months to February it will be 3 percentage points better. Matalan shares fell on fears it might miss that target, but that seems a harsh judgement. This time last year, the company was still desperately slashing prices; now the sale items are taking up little floor space, and most of the store is already given over to the new spring collections.

The more important thing to note is that the sales rebound does not take us back to where we were two years ago, let alone to the height of Matalan's success two years earlier. Then, it was snatching business away from the mid-market clothiers, and drawing up bold expansion plans. Now, although the "value" sector is again winning market share, the likes of Tesco and Asda are much more aggressive competitors for Matalan.

The company might make its 3-point gross margin improvement over the next few months, but its promise to improve by a further 2 percentage points over the next year is a taller order.

The shares, supported by takeover speculation, are certainly not in the value sector themselves, although the 4 per cent dividend yield is enough to justify holding on. New investors should shop elsewhere.

The best bet is to wait for Paddy Power to fall

Paddy Power, the Irish bookie jockeying for position in the UK, yesterday joined the line-up of betting operators hit by a run of winning favourites.

The largest betting chain in Ireland said margins had been affected by the bad sports results. Profits for 2004 are now expected to be at the lower end of forecasts, but they will still be about 57 per cent up on 2003. It has been expanding aggressively into the UK since floating in 2000, and it is paying off.

Betting is a booming leisure industry and odds-on to grow further. Internet gaming is already 20 per cent of Paddy Power's profits and rising, while growing awareness of the brand in the UK should help push the online business further.

The group now has 30 shops in London to add to its 145 in Ireland. The liberalising Gambling Bill should mean the pace of openings can be stepped up and taken nationwide.

Its strong trading is impressive since it has only a handful of the virtual racing and roulette machines - Fixed Odds Betting Terminals(FOBTs) - that the UK bookies have profited from. These are banned in Ireland and may yet be restricted in the UK. While this would bring Paddy level with other operators, FOBTs do provide a valuable, steady income stream that counters volatile sports results.

As we were reminded yesterday, bookies' results are always vulnerable to a losing streak and Paddy's shares, at €11.15, should be on a lower multiple of earnings than their current 17. Wait for a cheaper opportunity to get in.

DFD can benefit from rising consumer debt

Maxed out your credit cards? Loan sharks snapping at your heels? Near despair as your debts top £15,000? Perhaps an "individual voluntary arrangement" might be for you.

IVAs are relatively new. You agree payments with an IVA arranger, who in turn negotiates with your creditors, getting them to agree to write off a portion of your debt. Your credit rating is trashed, of course, and it is an extreme option, but at least you avoid bankruptcy.

Debt Free Direct (DFD) is one such IVA arranger, advertising on daytime telly alongside the debt consolidators and remortgaging firms but offering a less ethically dubious service. The Government is keen to promote IVAs and the market is growing at 40 per cent a year. It seems inevitable that the consumer binge of recent years will send an increasing number of customers DFD's way.

Already DFD is struggling to keep up with demand. Its six-month earnings yesterday were disappointing because it took on staff who are still being trained. The short-term risk is that it won't meet its broker's forecasts for the full financial year.

The longer-term risk is that lenders demand DFD cuts its fees (currently about £7,200) so that more of the original debts are repaid. But this ought to be well outweighed by the growth of the market as IVAs become better known. At 128.5p, buy.

Comments