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?
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The Independent Online
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.