New Look still has work to do

New Look; Football clubs; Character Group
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The Independent Online

New Look has had more fashion disasters than a bad taste party in the past year or so. Yesterday's trading update showed a glimmer of hope for shareholders who have endured a series of profits warnings and a management shake-up. However, it is still too early to call the turn on this group, whose shares stand at half their 165p issue price three years ago.

Trading in the 15 weeks to 7 July is decent, but it is hard to say how much of this is due to the benign retail environment and the good weather rather than anything the New Look management is doing right.

Like-for-like sales were 0.6 per cent higher than the same period in 2000. This represents progress from the 0.2 per cent fall reported in March. There was also good news on the gross margin, which is up by 2.7 percentage points, helped by fewer mark-downs.

The reason the shares fell 3.5p to 85.5p was down to the cautious wording of the outlook statement. It said there is "still significant work to do before New Look can deliver sustained improvement". This begs the question as to whether yesterday's trading update represents unsustainable improvement but analysts are giving the company the benefit of the doubt.

New Look has been hampered by high turnover in its buying staff at its Weymouth headquarters. With staff now being given the option of working in London, the business hopes to offer more continuity. Too much emphasis on teenage customers and insufficient transitional ranges between seasons have been seen as recent problems. These issues can be addressed promptly. A longer term struggle is the move towards bigger stores and away from the cramped mature small shops that still dominate New Look's portfolio. Another distribution centre is also needed as Weymouth is hardly ideally placed to service the whole country.

Analysts such as Seymour Pierce are forecasting full-year profits of £37m. That puts the shares on a cheap and cheerful forward rating of 7 with a 7 per cent yield. But investors should wait and see evidence of a more sustained sales improvement before buying. Hold.

Football clubs

Could the £20m flotation of Watford football club herald a new lease of life for an apparently moribund sector? Despite suggestions yesterday that Arsenal is also considering a move on to the London Stock Exchange, and confirmation of bid interest in Leicester City, investors should not be tempted to go bargain hunting. These are not signs of life. Far from it.

Seymour Pierce, the brokerage behind the flotation of Watford, has made no attempt to market the club to institutional investors. Priced at a penny, the stock is a means for fans to make a contribution and take a punt on its on-the-pitch performance next season. Gamblers will find better odds in Watford's bookies.

The bid for Leicester City is believed to be from a fan – former director Gilbert Kinch. There can be no hope that takeover bids will emerge for other clubs. There is no sign of relaxation to the Government's 9.9 per cent limit on media group ownership of clubs, set after the BSkyB bid for Manchester United was blocked.

Meanwhile, as the summer transfers have underscored, player wages continue to soak up the increased gate receipts and media rights revenues. Arsenal might use a flotation to pay for a more lucrative stadium. But Leicester is issuing a £28m bond and Leeds plans a £50m securitisation for its new stadia: neither saw any demand for more shares.

The fate of Loftus Road, the parent company of Queens Park Rangers, is a salutory reminder of the risks. It had to de-list after player costs took it close to bankruptcy. A merger with Wimbledon was ruled out after fans revolted, emphasising the non-financial pressures by which clubs are constrained.

Football shares are for supporters only, and even they might prefer to buy the replica kit. At least you can wear it.

Character Group

Character Group makes and distributes toys, but has become more famous for issuing profit warnings. The group made a £6m misjudgement on demand for Star Wars toys in the run-up to the release of The Phantom Menace, and has never looked back on track.

Many of its 2,000 private shareholders were suckered in on the back of the market's irrational exuberance over one licensing deal or other. Chicken Run toys sold well, Harry Potter should do the business this Christmas, but neither alone can restore profitability.

The group is at least making sure it is not too exposed to a single toy and has developed a brand of digital cameras that is already topping the sales charts in Asia. It is benefiting, too, from the purchasing muscle of Giochi Preziosi. In the long run, this Italian toy manufacturer could mount a full bid. For now, it has underwritten the bulk of a £4.2m rescue rights issue approved yesterday.

Character's shares, down 0.5p to 22.5p, are at a new low. Its future hangs on having a better Christmas than last year, and even its house broker has suspended profit forecasts. Small shareholders have already been diluted out of contention after Preziosi took shares in exchange for bailing out the company. Until management has rebuilt its reputation in the industry and the City, private punters needn't throw good money after bad.

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