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Homeworks pays off in MFI sales; The Investment Column

It all seems to be going right for MFI Furniture. Its shoddy image seems to have been well and truly buried as far as consumers are concerned and the City seems to be happy too. Since the shares' most recent trough in March last year, they have outperformed the rest of the stock market by a third.

That performance seems fully justified by both the state of the company and the economic background. Despite the noise from the building societies and others, MFI claims not to have seen much benefit from a rising housing market, suggesting that the level of house moves is pretty static. So to have raised pre-tax profits 62 per cent to pounds 32.7m on like-for-like sales in the UK 13.5 per cent ahead in the six months to November is impressive. With the most important season of the year still ahead - MFI makes about 30 per cent of its sales in the 10 week period from Boxing Day - it is a sign of management's confidence that it is raising the half-way dividend by 13 per cent.

It is not all management's doing. As the largest integrated furniture maker and seller in the country, MFI is very dependent on high volumes matching its fixed cost base. The recent downward trend in gross margins has clearly been reversed, helped by lower raw material costs and the strong pound.

But the group is continuing to grab share in a market which probably grew no more than 6 per cent in the latest six months. The two- to three- year capital investment programme to revamp the stores and upgrade the manufacturing operations saw spending stepped up from pounds 20.1m to pounds 32.7m in the period and the effects are starting to kick in.

MFI estimates that it is gaining double-digit percentage sales increases at stores converted to the new Homeworks format, which offers an airier feel and a wider range of products. Seventy-eight out of a chain 184-strong are now operating in the new livery, and there is scope for 80 more to be switched over in the next two or so years.

Meanwhile, this programme is continuing to release surplus space which is being let out to other retailers like Dixons and Carpetright and could be generating annualised rental income of pounds 4m by the year-end.

MFI's fledgling operations are also at last showing promise. Eight years after its establishment, the French Hygena chain, now 98-strong, broke into profits of pounds 1m last year. Despite the bleak economic environment there, that should be bettered this year, with underlying sales up 11 per cent in the first half. It is not clear why MFI moved into trade sales, given the travails of Wickes and other operators, but the start-up Howden Joinery business seems to be doing well and the plan is to double the current 24 depots, with profits expected in two to three years.

But the real bull story at MFI is the hope that consumers are starting to spend again. All will be revealed in a March trading statement, but profits of pounds 90m this year would put the shares, down 2p at 191p, on a forward p/e ratio of 19. Hold.