Kwik Save feeling heat in kitchen as store sales crumble

THE INVESTMENT COLUMN
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The Independent Online
Just when things look really bad for Kwik Save, they up and get even worse. Britain's biggest discount supermarket insisted six months ago that this was not a business on its knees, despite the announcement of huge job losses, store closures and a collapse in profits. Management insisted then, as now, that Kwik Save's squeezed market position, between the big four superstore chains and the Continental "hard" discounters is not untenable. Investors must soon start to seriously question if any of these claims are true.

Yesterday's disguised profits warning contained enough signs to suggest that this is a business in long-term decline. And the shares fell another 17p to 291p.

The main worry is that the group's sales seem to be crumbling. Same-store sales fell by 1.6 per cent in the first half, but have nose-dived by 6 per cent in the seven weeks since the period end in mid-March. Management blames a third of the fall on an unflattering comparison with a strong period in the previous year, when sales were boosted by the price war on commodity items, which cut the price of baked beans to 3p a can. Even so, that still leaves a 4 per cent real decline.

Other indicators are equally worrying. Customer numbers fell by 3 per cent on last year. The average value of transactions declined by a similar amount. Kwik Save's punchy Australian chief executive, Graeme Bowler, points to a 1 per cent increase in margins as evidence that competitive pressure is easing and management is taking a firm grip on theft and waste. But in the long run the City is less interested in margins and more in building the sales line.

Kwik Save is making much of the launch of its own-brand range last month, with 150 more lines to come. This is a welcome move but, again, is more about building margins than driving sales.

Mr Bowler has nailed his colours to the mast with a stated aim of pushing the sales figures into, at worst, neutral and, with luck, positive territory by the year-end.

Managers do not usually make promises unless they are fairly certain of being able to fulfil them, but his one may come back to haunt him.

There ought to be a place in the market for a discount operation, but it is worth pointing out that as the big four superstore groups scoop up market share, Kwik Save is not the only one feeling the heat. The other division two players, such as Somerfield, Iceland and William Morrison, are also struggling to build sales and have been concentrating instead on margin growth.

Assuming analysts' forecasts of pounds 72m for the full year are met, Kwik Save shares trade on a lowly forward rating of 10. But they should still be avoided.

McAlpine deal raises doubts

Alfred McAlpine, the construction group, yesterday put investors out of their misery by unveiling the pounds 42m terms of its takeover of Raine, its much troubled rival. The reaction was predictably negative, with McAlpine's shares slumping 13.5p to 153.5p after it accompanied the announcement with news of a two-for-seven rights call at 142p to raise pounds 28.9m. McAlpine is offering 0.146 of its own shares for every one in Raine, valuing the latter at 22.4p.

The agreed deal, revealed last month, has plenty of industrial logic. The combination of the two groups' social housing businesses will create a marketleaders, delivering something like 1,400 units a year. That should be a growth business if Labour fulfils its pledge to revitalise the sector.

But the takeover hangs or falls on what the management makes of private housebuilding, which forms the backbone of both businesses. Although McAlpine's profits there slumped 20 per cent to pounds 9.1m on turnover of pounds 187m last year, the group should be capable of turning in margins of at least 10 per cent, based on the performance of better placed rivals. McAlpine's housebuilding side and Raine's Hassall Homes should give combined turnover of around pounds 320m, suggesting underlying profits of at least pounds 30m are in sight, more than double the 1996 figure.

The McAlpine management will get a fair wind from merger savings. Up to 200 jobs could go at Raine after the closure of four overlapping housing offices and the group head office. Analysts guess the potential savings could be as much as pounds 6m.

But Raine is in effect being bought from its bankers, following a bail out in 1995, and McAlpine shareholders are still smarting from the last rights in 1994 at 205p a share. If the group can achieve pounds 30m, the shares stand on a forward p/e of 9, but the management has a lot to prove. Unattractive.

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