Blue Chip: There's life after Archie

Despite its touchy-feely slogans, Asda wears a sensible suit that will fit for a long time yet

Asda, the foods and clothes supermarket group, exudes a brash, American quality. Its report and accounts are packed with slogans and a bland Asda-speak that defines the company ethos. In some ways, it resembles the apotheosis of American feel-good management techniques at their worst.

Phrases such as "Continuous renewal", "Colleague developments", (a reference to its staff), "Recovery to Breakout", all with a liberal use of capital letters, pepper the document.

Indeed, this year is the second in the three-year Project Breakout - the group's plan to continue the good work achieved under "Recovery and renewal".

Much of the blame for Asda-speak must be laid at the feet of Archie Norman, who dragged it from the brink of bankruptcy in 1992, and restored its fortunes.

The American style is no coincidence - Mr Norman was the youngest-ever partner of McKinsey's, the US management consultants. After being finance director at Kingfisher, he joined Asda at the nadir of its fortunes.

Under his guidance, Asda has taken its place at the top table. Project Breakout is Asda's plan to ensure that it stays there.

However, it will be doing so with a much reduced input from its talismanic chief executive, who this month hands over the reins to Allan Leighton. The latest glittering prize to fall Mr Norman's way was the safe Tory seat of Tunbridge Wells. He now becomes a part-time executive chairman.

Few in the City argue with the results. But it is the fruits of Project Breakout which will decide if Asda remains a bankable investment. Similar returns on the shares over the next five years are unlikely - although stockbrokers continue to recommend Asda.

The stage seems to be set for a period of humdrum growth. However, the group has continued to make headlines in its efforts to battle against restrictive practices. Most prominent has been its campaign to break the retail price maintenance (RPM) agreement in over-the-counter pills and medication - one of the few remaining legally supported price-fixing arrangements, since the collapse of the net book agreement. Asda won a major concession when the Office of Fair Trading agreed to take RPM to the courts.

The commercial advantages of such ventures are open to question. Even if Asda can sell pills, the entry of rivals will ensure its head start is short-lived.

Given a mature UK market, all supermarkets are faced with the same conundrum: how to compete against rivals while there is so little to differentiate them. One answer is to focus on service: "Friendly, motivated staff are probably more important than anything else, other than price," says finance director, Phil Cox.

So Project Breakout is very much a case of Asda sticking to its knitting. It wants to continue to push up margins, while adding value to products. It takes seriously the slogan, "Asda: good honest value". The group was one of the first to spot the opportunity for price-cutting, and although that seems to be fading, it has proved a boon for Asda's market share. Mr Cox describes the essence of Project Breakout as "permanently low prices".

Clothes, however, offer the attractions of higher margins. Asda hopes that see clothing sales, running at around 6 per cent of total sales, will double over the next three years. Last year, it paid pounds 16m to buy in the remainder of George Davies Holdings, the company of the former Next supremo and fashion guru. Sales of clothes from October to June this year rose 10 per cent. Asda wants to make the "George" label Britain's second family clothing brand.

And CD and video sales have passed the pounds 100m mark to make it the fifth- biggest home entertainment retailer in the UK.

In 1995 it invested pounds 349m, of which the bulk, pounds 136m, went on new store openings. Another pounds 111m went on refurbishment, with the rest on systems, distribution, and the like.

These developments are only incremental in propelling sales higher. And by most criteria, it has caught up with the opposition. There may be room for small improvements; its pre-tax margin, at around 5 per cent, remains less than Tesco (5.6 per cent), or Sainsbury's (5.7 per cent).

Despite the gains of the last few years, the shares trade in line, or a little bit cheaper, than the sector. While the party may be over, its rate of growth should still look good compared to its peers. On a yield basis, the 3 per cent that looks obtainable in 1997 is tight. But the prospect of reasonable capital appreciation, underpinned by strong cashflow, should sway doubters.

Asda

Share price 118.5p

Prospective p/e 14.4*

Gross dividend yield 2.8%

Year to 27 April 1994 1995 1996 1997* 1998*

Turnover (pounds bn) 4.82 5.29 6.04 6.44 6.91

Pre-tax profits (pounds m) (125.9) 257.2 311.5 335 373

Earnings p/s (p) (5.91) 6.16 7.96 8.2 9.1

Dividend p/s (p) 1.76 2.2 2.65 3.0 3.3

*NatWest Securities forecasts

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