Iceland stays frozen in its losing streak

JD Wetherspoon; Reg Vardy
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The Independent Online

Christmas 2000 was grim at Iceland. The frozen food retailer had made a big push into organic food that sent customers away in droves. Christmas 2001, and no one expected things could be any worse. But they were – 4.2 per cent worse, as measured by like-for-like sales figures.

Iceland's new management team, headed by Bill Grimsey, who made his name by turning round the DIY chain Wickes, had expected sales to be flat. The misjudgement meant that the City's high esteem for Mr Grimsey is now just a little lower.

Mr Grimsey asserted that the falling Christmas sales could be fully accounted for by five products (beer, soft drinks, prawns, pizza and chicken nuggets, since you ask), which had been aggressively marketed as loss leaders in 2000. Although there were fewer customers, they spent more on average. And group margins are much healthier without the uneconomical price promotions, providing a springboard for future growth.

Maybe, but there is a lot of faith built into the current share price, even after a 6 per cent fall to 160p yesterday. Before the merger with Booker, the cash and carry chain, and before the crazy organics move, Iceland was heading towards profits of £100m a year. Most fans of the stock think that can still be possible when Mr Grimsey's big programme of refits and product ideas kick in. A rights issue next month, when the financial details of the refurbishment plan are unveiled, looks an increasing possibility.

But what if Iceland's customers are primarily interested in price promotions such as the ones that have been ditched? The brand itself, associated with the lower end of the market, and small store size could scupper a return to previous profit levels, as the giant supermarkets grow in size and influence. Iceland may need something more radical than tweaking product ranges in some localities.

The rest of the Iceland group (it will soon be renamed The Big Food Group) are faring better, according to the trading statement. Booker's sales were up 0.5 per cent over Christmas, as it increases its share of a declining market, and the Woodward bulk delivery business has continued to establish itself. However, a solution to the problems at Iceland will be needed before the current share price can be justified.

Yesterday's update should have provided signs that trading has at least stabilised. Because it didn't, and with a rights issue hanging over the stock, the shares are a sell.

JD Wetherspoon

Investors in the no frills public house giant JD Wetherspoon have been amply rewarded in the past six months. The stock has rocketed by nearly a third, returning close to its record high of 464p. However, the market took yesterday's Christmas and New Year's trading statement negatively, sending the shares down 10 per cent to 393p.

Tim Martin, the chairman, disappointed his fans by revealing like-for-like sales in the six weeks to 6 January had only increased 3.7 per cent, compared with 9.4 per cent the previous year. This ran counter to the image of a boozy festive period at the rivals SFI and Chorion. The 5.4 per cent like-for-like sales gain for the 23 weeks to 6 January showed the group is on a slowing trend.

Wetherspoon is expected to face challenges from newer entrants such as Luminar, Yates and Six Continents. And while the management is feted for its ability to deliver, analysts caution that even Mr Martin could face hurdles in tripling his estate from 500 units to more than 1,500 over the next 10 years – especially given the smaller towns he must court to reach his target. A repeat of the dip in sales that accompanied the 1998 football World Cup could also cause problems this summer as beer swillers opt for TV-friendly boozers. Peel Hunt expects earnings growth to fall from 22 per cent to 16 per cent in 2002.

The early successes of Wetherspoon's youth-orientated Lloyd No 1 sites, picked up 18 months ago from Wolverhampton and Dudley, provide medium-term potential, but the scale of Lloyds is small compared with the rest of the estate. The shares have defensive qualities in uncertain economic times, but these are already factored into the price. The stock trades on a forward price-earnings multiple of around 23, a premium to the sector that is no longer fully justified. Sell.

Reg Vardy

Figures this week confirmed that 2001 was a record year for new car sales in the UK. With prices tumbling and consumer confidence soaring, that was no surprise. So investors had plenty of time to prepare for yesterday's interim results from Reg Vardy, the UK's largest car dealership. Underlying profits were up 11 per cent to a record £15.2m. Investors who had bet on the figures beating analysts' forecasts – as they did – banked their gains, sending the stock down 15.5p to 327.5p.

Longer-term shareholders should consider taking profits, too. This year is not likely to be as good for new car sales, now that manufacturers have exhausted most of their price cuts, and with interest rates and consumers' willingness to take on debt both likely to fall.

Reg Vardy still sells more second-hand cars than new, and "establishing consistent differential pricing between new and used vehicles will take some time", it said. That means prices are still falling. There is also the worry of a European ruling on competition in the industry.

The experienced management will have a steady hand on the wheel in these foggier conditions, but now is not the time to buy into the stock.

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