More gloom at the House of Fraser

INVESTMENT COLUMN
Brian McGowan, the former Williams Holdings boss, has some explaining to do to the 100,000 small investors who piled into the House of Fraser stores group he steered onto the stock market last year. After a brief bout of excitement immediately after the float, the shares are now registering a substantial loss on the 180p offer price, even after yesterday's 6p rise to 150p.

Despite that uptick in the shares, Mr McGowan, who chairs Fraser, was less than convincing yesterday in his explanation for another set of dismal figures from the group. Pre-tax losses of pounds 4.3m in the 26 weeks to 29 July were barely changed from the pounds 4.5m deficit for the comparable period, when Fraser also had to bear the pounds 8.5m exceptional costs of the flotation.

Mr McGowan's talk of the weather and the National Lottery sounded more than a little lame. More serious is the time it is taking to turn round what looks a rather tired retailing group, which has admittedly suffered from years of under-investment. Fraser has now spent pounds 50m on 20 major store refurbishments since the float.

But the underlying 2 per cent like-for-like growth, respectable in itself against the rest of the high street, hides a rather patchy return on the investment so far. While the four out-of-town stores are showing double- digit sales increases, the refurbished sites, which have been contributing for a full 12 months, are delivering less than spectacular growth of around 6 per cent.

Meanwhile, the continuing stock problems suggest that Fraser's management control systems are still a long way from perfect. Clearing old stock hit profits to the tune of pounds 5m in the half year, when close to pounds 9m of unsold ranges were "cleansed". But the group goes into the second half with pounds 11m still to be cleared from last year and an undisclosed, but lower, quantity carried over from the summer.

Merchandising is another weak point. As yesterday's good results from Alexon show, operators of retail concessions within Fraser's 52 stores are cleaning up at the expense of the group's own merchandise. The 4-point rise in the share of sales represented by concessions, which now account for a third of the total, is estimated to have knocked profits by a further pounds 2m.

This year's profits now entirely depend on this month and the following three. With September sales drawing level with last year, the omens are better, and November's Budget could bring some pre-Christmas cheer to the high street. Net assets worth in the region of 110p a share should also give some sort of floor to the share price.

But at 23 times earnings, assuming profits of pounds 22m this year, the shares are high enough until management shows more conclusive evidence it has got to grips with the problems.

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