High price is the big flaw at Topps

Alexon is looking less like a bargain; Ultimate Leisure has moved high enough
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The Independent Online

The British obsession with our homes is great news for the likes of Topps Tiles, which has enjoyed stellar growth since listing in 1997.

The home improvement bug, fuelled by numerous television programmes, has led to ever greater demand for tiles and for the retailer's other offering, wooden and laminate flooring. Health concerns about the traditional carpeting (allergies etc) are also a driver of demand. However, this country still has the lowest per capita tile consumption in Europe, according to the company, so there's plenty of growth to come.

A trading statement from Topps yesterday confirmed a good Christmas, with like-for-like sales in the first 14 weeks of the financial year up an impressive 16 per cent (the financial year was changed in 2003 to start in September).

The company now has 201 stores in Britain and eight in the Netherlands. The stated target is 250 Topps outlets, plus 100 Tile Clearing Houses - its shops aimed at jobbing builders. The City believes that, longer term, the company is actually looking at some 450 stores.

Numis, the broker, pointed out that strong cash generation plus a relatively low outlay required for new outlets (less than £200,000 each), meant that we could expect a much bigger presence from Topps, plus scope for improved dividend payments. Numis upgraded its full-year forecasts to £23.9m, ahead of the City consensus.

Topps is the biggest independent chain, with some 17 per cent of the market, but in pure volume terms, the "big sheds" - the likes of B&Q - sell more tiles. Topps has the advantage of a bigger range and specialist advice.

The company serves roughly the mid-price point in the tiles sector but it has been taking its wooden floor offering more up-market, which seems sensible given the sort of people wood appeals to.

The company's better use of advertising and sponsorship has been noticed in the City, which also regards the Topps management highly. The only snag is the doubling of the share price, which closed yesterday at 599.5p, over the past year. That puts the stock on a demanding multiple of 16 times prospective earnings, making Topps a hold.

Alexon is looking less like a bargain

The weeks of foreboding in the run-up to Christmas that consumers were just not hitting the shops appear to have been real fears rather than just more hand-wringing by the high street stalwarts.

Or at least, the festive period was none too jolly for some retailers. While Next was yesterday able to report strong sales, Alexon, the owner of Dolcis shoe shops and the Bay Trading clothing chain, said sales were 1 per cent down in the crucial six weeks to 3 January.

Shares in the company - the first to open its tills to public scrutiny for the full Christmas and new year period - slid 3 per cent to 285p. It admitted cash flowing into its coffers had been "sluggish", although it said the sales period had got off to a stronger start.

However, once the sales are over, the outlook for the high street does not look too encouraging, with consumers already struggling under a mountain of debt and with the prospect of further hikes in interest rates.

Alexon said annual profits would still be in line with expectations. Encouragingly, gross margins are also stronger than at the same time last year.

There could also be good news on the dividend front, which is currently covered a conservative 4.5 times. Given the mature nature of the business, Alexon is unlikely to need huge amounts of cash to plough into buying new outlets. Instead, more of its profits may well be returned to shareholders in future.

Alexon, which is more diversified than many of its retailing rivals, is priced at a discount to the sector, trading on a forward price-earnings multiple of just eight times. However, its shares have gained strongly in the past year and are no longer akin to one of the bargains to be found in its chains. Avoid.

Ultimate Leisure has moved high enough

With the high street bar and club market generally continuing to have such a rough ride, Ultimate Leisure seems to be one business that is escaping the worst.

Perhaps this is because of its North-east of England bias or perhaps it has more to do with the style of its bars - many of which are themed, such as its rodeo "Coyote Wild" bars in Derby and Mansfield.

Either way, Ultimate Leisure is bucking the trend and looking pretty resilient. Trading in the six-month period to 31 December was "in line" with its expectations and the company enjoyed a particularly good Christmas.

Consequently, pre-tax profits for the first half will be at least £4.2m - ahead of market expectations and an increase of at least 28 per cent on the same period a year before.

Not surprisingly, analysts were yesterday nudging up their financial forecasts for the year to £8.7m of profits with about 29 pence of earnings. That is not a bad result considering that the market has become intensely competitive with promotional and discount deals flying around from rivals.

But the company's resilience in these tough times has not gone unnoticed by the City either - the shares have rallied sharply over the past year and were up another 14p yesterday to finish at 312.5p.

That puts the stock on a rating of 10.8 times. That Ultimate Leisure is doing well in a competitive market is commendable. The rating, however, makes it a hold.