Derek Pain: Retail laggards start to catch up

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The Independent Online

Not long ago, retail shares, in stockmarket terms, were well past their sell-by dates. As the mad internet boom captivated investors' imagination – and cash – shopkeepers seemed destined to be among the major casualties, with the Old Economy wilting before its remorseless advance.

Not long ago, retail shares, in stockmarket terms, were well past their sell-by dates. As the mad internet boom captivated investors' imagination – and cash – shopkeepers seemed destined to be among the major casualties, with the Old Economy wilting before its remorseless advance.

Today many retailers are flying high, some even threatening to recapture past glories. And corporate action is in the air with three possible bids signalled and deep suspicions lurking that others are being prepared.

The retailing comeback has been achieved despite some falls from grace. Marks & Spencer is the most depressing example, although many others have found the going tough. The debate now is whether the retail run is over. At least one leading securities house, Schroder Salomon Smith Barney has suggested it may be time to lock in profits from this year's strong performance. Others say there's still plenty to go for.

Certainly, old laggards have stirred. Even the House of Fraser department stores chain – once named House of Failure – has reported encouraging trading and its shares are near their year's high. The retailing environment has been benign of late and it is not surprising that life is now much more comfortable for the shop-keeping fraternity.

But this has partly masked the ability of some groups to overcome seemingly insurmountable problems. HoF and the Safeway supermarket chain have to some extent seen their recoveries submerged by the general mood of well-being.

Department stores, once seen as breeds of retail dinosaur, seem to have recaptured some popularity. The yearly performance of Merchant Retail, which takes in the small Joplings chain, offered an example of the robust trading they enjoy.

Retail recovery plays still abound. Somerfield, the supermarket group, could be responding to the undoubted talents of John von Spreckelsen ( ex-Budgens). I would hold off diving into Iceland, another receiving resuscitation. The frozen food retailer's new chief executive, Bill Grimsey, probably needs more time to get a revival under way. His record suggests he will eventually succeed.

MFI, the furniture chain, is staging a comeback and should be seen as a growth company. I last discussed MFI in October 1999 when the shares were 42.5p; they are now 133.5p.

I did not put them into the no pain, no gain portfolio, though obviously they would have been a rewarding recruit. Safeway, then under the weather, was added earlier that year at 248.5p. Its revival, with the shares nudging 400p, after crashing to 154.75p, has been a retailing success story.

Another has been bookseller Ottakar's. Like other book retailers it seemed fodder for the Net revolution. When I looked at the shares they were around 45p. The internet competition has failed to materialise. They are now 120p.

Merchant Retail is an interesting share. Not because of its department stores. Besides Joplings, it owns de Gruchy, which operates in the Channel Islands. Its main strength is its chain of 67 outlets trading under The Perfume Shop banner. The group's profits moved from £1.8m in 1997 to £8.1m this year. Eps has risen from 0.25p to 1.15p. It may extend The Perfume Shop concept to Europe adding cosmetics and skincare to its range. Profits this year could, I believe, nudge £10m. At 87p, the shares are not, by retail standards, cheap, but could be a good investment.

The three takeovers involve The Body Shop, Bentalls and Oasis. Whether the signalled Mexican bid for Body Shop appears or not, there is no doubt the sudden display of corporate interest has helped shares. There are even hopes of a counter-bid, particularly if founder Anita Roddick accepts the Grupo Omnilife embrace. Mystery surrounds the possible bidder for Bentalls, the department stores group. Rival Allders is in the frame.

Oasis, a womenswear chain, is on the receiving end of a possible 105p management buyout. The offer is regarded as too low. Still the shares, once above 400p, are 94.5p, reflecting a lamentable trading record.

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