Arcadia in positive mood despite sharp profits fall

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ARCADIA, the Dorothy Perkins and Burton Menswear retailer that issued a profits warning in December, confirmed the sharp fall in first- half profits yesterday after a slump in demand over Christmas forced the group into a huge discounting programme.

However, the company's shares soared 13 per cent to 272.5p as the City responded to more encouraging news on current trading.

"It is not a strong recovery but we are starting to see more encouraging signs," said Arcadia's finance director Nigel Hall.

Sales in the eight weeks to mid-April are ahead of last year with sales' densities in line with expectations.

Arcadia said the womenswear market, which had a tough 1998, is starting to recover helped by strong fashion trends such as Skousers - skirts worn over a pair of trousers and ethnic-looking embroidered blouses.

Mr Hall said consumers are remaining value conscious and that Arcadia's stores are running a series of promotions such as two pairs of jeans for pounds 35 in a bid to boost sales.

The news was a welcome boost for beleaguered Arcadia shareholders, who have seen their shares underperform the market by 47 per cent since the former Burton group demerged Debenhams in December 1997.

The company blamed the first-half profit fall from pounds 52m to pounds 30m on "some of the toughest trading weeks the clothing market has seen".

The weak women's clothing market took its toll on Arcadia's Top Shop and Dorothy Perkins.

Operating margins fell from 6.6 per cent to 3.9 per cent as the company moved to cut prices to shift stock in the January sale.

Costs as a percentage of sales also rose as turnover remained weak.

Arcadia has made progress in becoming a "multi-channel retailer". It is investing in a home-shopping service with catalogues for its Racing Green, Hawkshead, Evans and Dorothy Perkins brands.

The company is set to achieve pounds 1m of clothing sales on the Internet this year, making it the UK's number one in on-line clothing sales. It is also taking part in digital television trials on Shop, the Carlton-Littlewoods joint venture.

The steep fall in interest rates and receding fears of recession should help retailers this year.

And a value-conscious approach from consumers should play into Arcadia's hands as many of its formats, such as Top Shop, are regarded as lower price offers.

But some analysts remain sceptical on whether the bounce in the Arcadia's share price can be sustained.

They point out that Arcadia utilised pounds 7m of provisions in the first half and that it faces a higher interest charge.

Competitive pressures are also set to increase from the wounded Marks & Spencer, New Look and Asda's George brand, which could achieve fresh momentum if its merger with Kingfisher goes through.

SG Securities is forecasting full-year profits of pounds 51m. It suggests that on a forward multiple of less than 15 the shares are a buy.

Others analysts are more cautious saying the clothing market will remain volatile this year and that there are cheaper retail stocks around.