Body Shop has cultural problems

Anita Roddick, managing director and inspiration behind the Body Shop, was making much of the brand question yesterday.

The most powerful brands, she said, such as Heinz, Persil and Coca-Cola, were all more than 70. At a mere 18 going on 19, Body Shop is a blushing adolescent by comparison.

Mrs Roddick's message was that building a brand takes time and that long- term gain can mean short-term pain. And pain there certainly is at the UK cosmetics retailer at the moment, most of it emanating from the United States.

Group pre-tax profits may have improved from £29.7m in 1994 to £33.5m this year, but the American division is hurting. US operating profits fell from £6.2m last year to £4.9m this time and like-for-like sales dropped by 3 per cent over the year and by 8 per cent since the year-end.

The group's problem is that while Body Shop is a household name in the UK, few in the US have heard of it.

The company only started over there in 1988 and it has been expanding at breakneck pace ever since. Last year it added 65 stores to take the total to 235. A further 40 will open this year.

Body Shop admits that, in the dash for growth, it lost sight of what was happening inside the stores. The Americans like a steady stream of new products, but Body Shop launched hardly any.

The shops looked tatty and service was not as good as in the UK. New York has been a particular problem.

Competition has also been hotting up as Bath & Body Works, the US market leader, began competing more aggressively on price.

The company is responding to the problem. Terry Hartin, who sold his cosmetics business to Body Shop in 1991, is moving out to North Carolina to beef up the US operation. There will be more product launches.

A mobile Body Shop in a pantechnicon juddered on to the highways in May to take the message to Hicksville USA.

But Body Shop faces a cultural problem in America in that it may have to do things in the US market that it would not contemplate anywhere else. It may even have to worry less about the integrity of the brand and resort to discounting.

In the UK there are still opportunities - more shops on railway stations, for example - but the market must be reaching saturation point. This only serves to underline the importance of the US to the group's future growth prospects.

Kleinwort Benson is forecasting pre-tax profits of £38m next year. With the shares down 13 per cent to 152p yesterday this puts them on an undemanding prospective price-earnings ratio of 12.5. But with so much depending on turning the US operation around, the shares are best avoided.

Measure of hope at BSkyB

Investors who backed December's British Sky Broadcasting flotation have seen their shares go almost nowhere. Apart from a few spikes, which saw it hit a high of 275.5p in February and a low of 243p in April, the share price has hovered around the 256p launch level for most of the past five months.

News yesterday that the satellite broadcaster had failed to win a share in the fifth terrestrial channel, alongside figures showing a leap in nine months' profits, did little to disturb the market's equilibrium.

Pre-tax profits up 65 per cent to £104m in the period to March were broadly in line with expectations, leaving the shares down just 0.5p to 259p. That was in spite of an upbeat statement from Sam Chisholm, chief executive, who said the company had strengthened its market position. With further programming acquisitions, he anticipated "significant" growth going forward.

On the face of it, there certainly seems little slackening in profits growth. The near two-thirds expansion in the nine months has accelerated to a near doubling in the latest quarter, with pre-tax profits up from £24.9m to £49m in the three months to March. But that reckons without the benefits of the £824m float proceeds, which cut debt to around £900m and the quarterly interest bill from £22.6m to £16.9m.

At operating level, growth slowed from 53 per cent in the nine months to 39 per cent in the latest period. BSkyB did well to add a net 90,000 subscribers in the traditionally quiet January to March, when pre-Christmas enthusiasm for Sky's burgeoning channels tends to wane, leading to high switch-off rates (the "churn"). But analysts remained slightly disappointed by subscriber growth, which at 576,000 for the nine months, left a total of just above 4 million at the end of March, the same as two months earlier.

Any sign that the recent exponential growth in sales is starting to slow would hit BSkyB's shares, but there remain encouraging signs. The company will continue to be a key supplier of programmes for cable television, which accounts for around 1million of its subscribers. That should tie the fortunes of satellite's main competition to those of BSkyB for the immediate future.

The churn rate also seems to have settled down to around 12 per cent, year-on-year, despite October's price rises, which pushed up the monthly subscription by £3 to £22.99 for the full package of 21 channels.

Profits close to £155m for the year to June would put the shares on a prospective multiple of around 28. That looks high and could be vulnerable to sudden shocks. But the backing of a galaxy of media companies led by Rupert Murdoch's News International, which sits on 40 per cent of the equity, should give investors a measure of confidence in the future. With a maiden dividend of perhaps 3p or 4p in prospect, the shares are worth holding.

EFG emerging

from the woods

EFG, the former Economic Forestry Group, lost its way badly after its original business was knocked on the head by Nigel Lawson's decision to end tax breaks on investment in trees in 1988.

Subsequent attempts to diversify into activities ranging from garden centres to barbecues left a trail of losses. But since new management headed by Robin Garland moved in and launched a £3m rights issue at 12p a share two years ago it has been thoroughly cleaned out.

Loss-makers have been eliminated following a £4.47m disposal programme that culminated in February with the £2.17m sale of a garden centre in West Sussex.

The fruits of that were revealed yesterday in pre-tax profits that have soared from £132,000 to £917,000 in the 12 months to January. Shareholders, who received a nominal 0.1p dividend last year, will see the payout boosted to 0.5p this time - the first real payment since 1990.

Mr Garland has a net cash pile of £1.94m to pursue acquisitions, which he says must be substantial, profitable and preferably in a niche business. One making profits of £1.2m has escaped his grasp, but three more are under the microscope and he hopes to make an announcement before the interim stage.

Until something happens, investors have little by which to judge the value of the business, but Mr Garland's record is mixed. He was at the helm of the now-defunct Scottish Heritable Trust until 1990, just when things started to go wrong for the mini-conglomerate.

Meanwhile, trading profits at EFG's remaining garden centre and peat business have fallen from £1.23m to £773,000, once the effect of huge provisions are stripped out.

The shares, up 1.5p to 16.5p yesterday, are roughly equal to net assets, but remain a gamble.

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