House of Fraser looks brighter

Indigo Vision; Yates

House Of Fraser, which styles itself as Britain's leading retailer of designer brands, appears ready to put years of drab results behind it.

John Coleman, the chief executive of the UK's third-largest department stores operator, has been busy refurbishing stores and revitalising product selection by introducing new systems and improving its supply chain.

The heavy investment appears at last to be paying off. Sales and margins are marching ahead. The company that owns Dickens & Jones and Barkers of Kensington is picking up market share.

But the improved performance comes from a low base.

Like-for-like sales growth has accelerated to 8.1 per cent in the first 19 weeks of the current year, compared with 5.6 per cent recorded this time last year.

Total sales are ahead by 16.3 per cent, while the gross profit margin is up 0.4 percentage points.

The key to success, however, will be for House of Fraser to translate sales growth into higher profits.

It has been a rocky ride for investors in recent years, but the share price is improving. After bottoming out at a miserable 42p in October, the shares have more than doubled and rose another 0.75p yesterday to 110.25p.

House of Fraser now trades on a forward price/earnings multiple of 14.2 and offers a dividend yield of 5 per cent. Analysts are looking to raise their forecasts for the current year after the buoyant trading update, which should drive the ratings to even more attractive levels.

The shares could move a little higher, but they are not likely to repeat the strong rise of the past eight months.

Indigo Vision

Taking the covers off a new product and in-line third-quarter results gave IndigoVision a boost yesterday. The company's technology, which enables video to be played over the internet and on handheld devices, is initially being targetted at the security industry.

Yesterday's product launch, developed with an unnamed consumer electronics group, will see Indigo's Video Bridge technology installed in a handheld device for security guards.

In the nine months to 30 April, pre-tax losses doubled to £4m from the year-ago period on sales of £1m, up from £496,000. Stripping out a £1.5m interest gain, losses totalled £5.5m.

While everything is on track, the company still has much to prove. It needs to sign more licencees, particularly among consumer electronics firms, to add to the current list of just five. Its biggest wins so far are Panasonic and Cirrus Logic.

Indigo's saving grace is that it still has £34m in the bank. The annual burn rate is only about £6m to £7m a year.

This means that the company has sufficient money to reach profitability, expected in the middle of 2003, with some comfort.

Encouragingly, Indigo says it is in negotiations with several new customers. The implication is that it will add more licencees this quarter.

But with analysts forecasting sales of just under £2m this year, the stock is trading on an uncomfortably heady ratio, given its early stage of development. At 220p, up 5p, this remains one for the brave.

Yates

It's been a dismal 18 months for shareholders in Yates, the bars operator whose main brands are the Wine Lodge and the Ha! Ha! Bar & Canteen. The revelation last Friday of a takeover approach helped the stock rebound above 200p, but it remains 60 per cent down from the 500p recorded after a relief rally in 1999.

Results for the year to 1 April showed yesterday that profits before tax and exceptional items dipped to £13.8m, from £15.6m. That was in line with forecasts. The profits downturn reflected a list of management slip-ups: openings that didn't generate much excitement or earnings; a move away from premium pricing, which didn't boost volumes; and a new menu, which is being scrapped.

Progress has occurred with the re-branding of the Wine Lodges, but the return on capital has been lacklustre. One ray of light has emerged: with discounts being reined in, gross margins on beverage sales expanded by 2 percentage points to 69.5 per cent in the second half, which bodes well for recovery.

For the unknown suitor, Yates holds attractions as a well-branded, high-volume estate. On Beeson Gregory's estimate of fiscal 2002 earnings per share of 19.4p, the stock, down 8p at 211.5p, trades on an a P/E of just 11. So a buyer could probably pay up to 250p without risking dilution. Investors in Yates should hold on for now.