Heavy weather for retail newcomers

News Analysis: Monsoon shares have halved since the company came to the market in February. Is this just part of the general gloom in retailing or is it something more?

MONSOON AND Matalan, two recently floated fashion retailers, recorded rare share price gains yesterday as they reported better-than-expected results. But the mini-revival still leaves shares in Monsoon languishing well below their issue price while Matalan is only a few pence ahead of the price offered to investors

Monsoon, whose stores specialise in an upmarket ethnic look, saw its shares lose almost half their value between their flotation in February and yesterday's figures. Shares in Matalan, which operates a more value- based format in out-of-town stores, have fallen by 20 per cent since their high point in June.

These two groups are not alone in their plight. Any investor who subscribed to retail new issues this year has had their fingers burned. New Look, the budget-priced fashion chain, and Game, the computer games specialist, also proved to be market disappointments.

While UK markets have clearly been spooked by the Asian crisis, Russian meltdown and gyrations on Wall Street, the retail sector has been a significant underperformer.

Between the start of the year and the end of July, the general retail sector underperformed the FT All Share by 15.7 per cent. There has been a revival in the past few weeks, but this has not helped the smaller stocks.

The sector has improved as perceptions changed on the future direction of interest rates. But investors have been targeting mainly the larger and more liquid defensive stocks. Funds have been directed principally towards the FTSE 100 retailers - Marks & Spencer, Boots, Kingfisher and Great Universal Stores, which are seen as "safe havens" in troublesome times. Smaller retailers have found their stock even more unloved than usual.

"Smaller retailers have been hit from two angles," says Louise von Blixen, retail analyst at SG Securities. "The whole market has turned down and they cannot escape that. And the retail sector has been unpopular after a spate of profits warnings."

Nick Hawkins at Merrill Lynch says size does matter in markets like these. "The danger with smaller companies is that when you get a slowdown they are more exposed. They have less flexibility to cut costs and they do not have the same financial muscle to squeeze suppliers."

Some analysts argue that some of the recent retail new issues have been over-priced, or came to the market under a cloud. Monsoon, for example, had abandoned a previous attempt to float in 1996. When it tried again it came on a rating of 19, and only 25 per cent of the equity was floated. Matalan raised City eyebrows by floating on a similar rating to Marks & Spencer. Only New Look, which had also pulled out of a previous flotation attempt, was priced competitively at around 13 times. But even that has not been enough to save it from the shift in market sentiment.

Peter Simon, the Monsoon founder and chairman, who made pounds 85m from the float, says the market turned quickly. "Next issued a profits warning literally within weeks of our float. They are one of our key peer group. Then Marks & Spencer showed some disappointing sales over the summer."

Mr Simon denies that the issue was over-priced, even though the shares have barely risen a penny over the placing price. "You choose advisers [BT.Alex Brown] and they price it. Whether they got 190p per share or 150p was up to them." His advisers point out that even with a racy price tag, the issue was comfortably subscribed.

Matalan's finance director, Ian Smith, claims the group's shares were priced fairly on flotation. They enjoyed several weeks of bright trading before soaring above 300p when the stock entered the All Share index, which pushed tracker funds into buying. "That was clearly a ridiculous situation," he says.

But has the pendulum swung back too far? Nick Hawkins at Merrill Lynch says: "There are fashions and trends in stock markets and I can't see this situation lasting forever. As we get into 1999, and with interest rates falling, people will start to worry less about the downturn and start thinking more about the upturn. People will start to look at the market and ask: `Where's the value?'"

They may find the value in the retail sector and among smaller companies, in particular companies such as Oasis Stores, for example, which now trades on a forward multiple of just seven and yields around 6 per cent. Monsoon shares yield 5 per cent and Next, a former FTSE 100 constituent, produces a similar income.

The retailers themselves claim their ratings bear no relation to their performances. Take Monsoon. It yesterday reported its 13th consecutive year of profit increases with a 13 per cent rise in full-year profits to pounds 28.6m. Margins were maintained despite one of the worst summers on record. Like-for-like sales were down by 6 per cent in current trading, but that was due mainly to the poor weather in June and early July and comparisons with a strong previous year. Sales growth in August was higher in double digits, and there is no stock overhang of summer ranges as the autumn selections appear on the shelves.

"I never look at the share price in the paper and we have a pounds 100 fine on the board for anyone that mentions it," Mr Simon says. His view is that the management should concentrate on getting things right in the stores. After that, the share price should look after itself.

Monsoon has opened 11 new stores this year, taking its total to 229. It is introducing a range of shoes and a Monsoon perfume. It is also looking to add larger dress sizes, such as 18, 20, and 22 to extend its customer base.

Matalan's results were similarly impressive. It recorded a 163 per cent profits jump to pounds 4.7m with like-for-like sales ahead by 2.7 per cent. Mr Smith feels that Matalan's value priced offers will stand it in good stead in the downturn. "If money gets tight that should help us as we pride ourselves on value for money."

Matalan's shares rose by 25.5p yesterday to close at 246.5p. Monsoon rose 9.5p to 112p helped by director buying.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
David Silva strokes home his and City's second goal
Arts and Entertainment
a clockwork orange, stanley kubrick
The Tesco Hudl2: An exceptional Android tablet that's powerful, well-built and outstanding value

Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
After another poor series in Sri Lanka, Alastair Cook claimed all players go through a lean period
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
Life and Style
food + drinkAuthor DBC Pierre presents his guide to the morning after
Life and Style
food + drink
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas