Bottom Line: Ratners still shaky

JAMES McADAM is doing all the right things at Ratners, whose name change draws the curtain on another sad tale of high street hubris.

Reducing costs, cutting inventories, closing shops and focusing on margins at the expense of sales is putting the company back on track. That is the good news.

The bad is that, while the (profit and) loss account for the year to January was written in a lighter shade of red than a year ago, the balance sheet is as shaky as ever. A financial reconstruction looks imperative.

If it happens, ideally after a better Christmas trading period has softened up investors, ordinary shareholders will be heavily diluted.

Those looking for a recovery play along the lines of the clothes retailer Next are running ahead of the story. They should remember that the survival terms imposed on WPP, another 1980s go-go stock, were a great deal kinder to its creditors than to its shareholders.

Twelve months ago Ratners' borrowings of pounds 223m were supported by net assets of pounds 302m, not a strong position but one the company could cope with. Last January's financial snapshot showed debts of pounds 288m swamping shareholders' funds of just pounds 257m despite good cash flow from operations.

Arguably an extension of banking facilities for another two years is confirmation that the company has turned the corner. But at some point that debt, compounded by more rolled-up preference dividends, will have to be repaid.

Now the cost base has been honed to a bare minimum, future sales growth will drop through to profits. However, that will not lead to earnings or dividends while interest charges and pref holders remain so demanding. Yesterday's 3p rise in the share price to 35.5p reflects a victory for hope over experience. Avoid.