Heavy demands at Harvey Nicks

The Investment Column

Harvey Nichols, the upmarket Knightsbridge store, has built its reputation on selling fancy goods at fancy prices to its well heeled clientele. It is fitting, therefore, that the company's flotation should be priced at a punchy level that may deter all but the shop's most ardent supporters. Even Edina and Patsy of Absolutely Fabulous might think twice about this one.

At 270p per share, the price values Harvey Nichols at pounds 148.5m, which is an awful lot for a single store. An additional problem for private investors is that as the shares are being placed only with institutions, ordinary folk cannot buy them until they start trading on Friday. By that time, given the reported level of institutional interest, they are likely to have risen to an even bigger premium.

The real winner here is Dickson Concepts, the Hong Kong-based company which currently owns all the shares but will be reduced to a 56.4 per cent holding after the sale.

The company's advisers say the placing has been 15 times oversubscribed and that fund managers have found their allocations drastically scaled back. This indicates healthy demand but is also testimony to the kind of marketing drive, both here and in the US, that is normally put behind much larger companies.

On this valuation it is perhaps worthwhile comparing Harvey Nichols with House of Fraser, the department store group which floated two years ago. House of Fraser has 51 department stores and has a market capitalisation of pounds 400m. Harvey Nichols has one and is valued at pounds 148m. Even given the value of the Knightsbridge property, that looks steep.

Harvey Nichols has clearly been a financial success in recent years. A loss of pounds 3.4m on sales of pounds 55m in 1993 has been turned into a profit of pounds 6m on sales of pounds 77m last year. The estimate of this year's figures are for profits of pounds 9m on sales of pounds 90m. In a period when some department store operators have struggled, Harvey Nicks has developed a strong niche in fashion, which has won the loyalty of London shoppers.

There is also an ambitious pounds 9.5m expansion strategy for the retail business which includes the opening of regional stores, and restaurants.

Retail flotations are often popular because of their well known brand names and people's interest in owning a slice of their favourite store. On estimated earnings per share of 10.5p for the year to March 1996, the shares are on a thumping price/earnings rating of 25.

Harvey Nichols is a strong brand and a well managed business. But at these levels the shares look too expensive.