Little warrant for concern at Dixons

The Investment Column
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The Independent Online
It is not surprising that John Clare, Dixons' white-haired chief executive, was wearing a Santa-like smile yesterday. Father Christmas clearly came early to Britain's leading electrical retailer last year. The consumer spending revival finally arrived and when it did Dixons found that much of its competition, particularly from the electricity companies, had fallen on hard times.

Dixons' increasingly dominant position in its sector has worked wonders for its share price, which has soared in the past two years. After dipping to 170p in July 1994, the share price has more than trebled.

The buoyancy was backed up by good trading figures yesterday. Profits in the six months to 9 November were 53 per cent up at pounds 57.5m. And like- for-like sales - the key measure - were 8 per cent higher and the margin maintained.

PC World led the way, boosted by the boom in personal computers. But Currys and The Link, Dixons' high street mobile phone chain, also did well.

With more windfalls from Halifax and Woolwich building society flotations due in the summer, this year also promises rich pickings for retailers such as Dixons. Share payouts of pounds 800 to pounds 1,000 are just the kind of sums that will be traded in for a new washing machine or a swanky PC.

The 27p fall in Dixons' share price to 511p yesterday was down to two factors. The first was that the 8 per cent increase in like-for-like sales over the Christmas period was not quite as exciting as the market was expecting. But the main reason is the potential impact of the new insurance premium tax on Dixons' profits. Dixons makes 8.5 per cent of its group sales from warranties so the Chancellor's decision to raise VAT on the policies from 2.5 to 17.5 per cent will clearly hit Dixons hard. At worst it will slice pounds 30m off the bottom line. But assuming Dixons manages to claw some back in higher prices the hit could be about pounds 15m. But it is the uncertainty - no one really knows how inelastic demand will prove to be - that has affected sentiment.

Should these fears prompt shareholders to take some profits after the recent run? Not necessarily. Some analysts are pointing out that warranty fears over Dixons have been aired before and that the company has always shrugged them off. It is also worth stating that the building society windfalls will have a considerable impact. Cash from previous windfalls may have been reinvested. But with the economy improving things might be different when these payouts arrive in July or August. It is highly unlikely that pounds 15bn is going to be tucked back into safe little savings plans. With analysts forecasting profits of pounds 195m next year, the shares trade on a forward rating of 17. Yesterday's fall should be seen as less a cause for concern and more of a good buying opportunity.

Lowe on the

acquisition trail

Robert H Lowe, the Cheshire-based sportswear maker and packaging group, is a good case study of a company that has gone beyond the restructuring and recovery phase but needs more than just the prospect of sustained organic growth to keep investors happy.

Boosted by the impact of Euro 96 on replica football kit sales, results for the year to October 1996 make impressive reading. Pre-tax profits rose 78 per cent to pounds 2.4m on turnover 93 per cent higher at pounds 30.5m. Earnings per share advanced 53 per cent to 2.3p while the dividend was raised by a half to 0.3p.

Profits included a maiden pounds 567,000 contribution at the operating level from Majoca, a corrugated packaging business bought for an initial pounds 2.2m in shares two years ago. The results draw a line under Lowe's chequered past.

At one stage in the late Eighties the shares touched pounds 20 but they went into free fall after a series of disastrous acquisitions, most notably childrenswear group BabyGro, took Lowe to the brink of collapse.

But new management under David Sebire and fresh financing have given Lowe a new lease of life, though rehabilitation of the shares, as low as 8p three years ago, has been slow. Last night they closed 1.5p higher at 26p.

Mr Sebire warned yesterday that following an "extremely strong performance" there may well be a pause in profit growth at the sportswear division until the effects of the 1998 World Cup, to be held in France, are felt.

In the meantime, Lowe intends to make further acquisitions in both the packaging and sportswear divisions to drive earnings forward.

Clearly Lowe has been encouraged to go down the acquisition route again by the success of the Majoca deal, but the strategy increases the risk profile.

The main problem is finding the right deal. Lowe would like to improve the distribution of its sportswear and buy suitable packaging and labelling firms, but opportunities at the right price are few and far between.

Assuming no corporate action, brokers look for pre-tax profits this year of up to pounds 2.9m rising to pounds 3.2m in 1998, though the forward price/earnings ratio remains at 10 as tax losses carried forward drop away. That is a fair reflection of concerns about Lowe's reliance on acquisitions. Hold.

JJB Sports

shows its paces

Yesterday's 11-month trading statement from JJB Sports went some way to justifying the City's enthusiasm for a small band of sports and leisurewear retailers, which have been among the stock market's strongest performers in the past year or so.

JJB shares have risen by 50 per cent over the past year. Since former Blackburn player Dave Whelan brought the company he founded from a single shop in 1961 to the market in 1995 they have risen four-fold. He and his son-in-law, Duncan Sharpe, still own just over 50 per cent of the company, which is now worth pounds 260m.

In the 11 months to the end of December sales of the shops' mainly branded sports equipment and replica football strips have risen 44 per cent. Most of that growth has come from an ambitious expansion programme, which took the chain from 130 to 170 outlets, but like-for-like sales, the real measure of a retailer's success, were up an impressive 12 per cent.

JJB continues to grow at a good lick, with contracts exchanged on 27 new shops and a further 11 near to completion. A flagship superstore on London's Oxford Street is scheduled to open in late March.

The key to JJB, as it is to Blacks Leisure and recently floated JD Sports, is whether the recent surge in sales is down to sports clothes being temporarily in fashion, boosted by a cluster of high-profile events such as Euro 96, or whether there really has been a sea change in clothing habits towards sports and active outdoor wear.

Only time will tell. In the meantime, JJB's shares will be valued on the basis of forecast profits in the year to the end of this month of about pounds 18.4m and pounds 23m next time. Those forecasts put the shares, unchanged yesterday at 295p, on a prospective price/earnings ratio of 23 falling to 18. For a rapidly growing business that is not excessive, but the shares have paused for breath and look fully valued for the time being.