Mulcahey still has plenty to do
THE INVESTMENT COLUMN
Tuesday 25 July 1995
The problems were spelled out in results for the year to January, which saw profits down from pounds 310m to pounds 281.5m, the first decline since the group's formation in 1982. Comet made a pounds 2m loss and Woolworths' profits fell by a third after stock problems and uncompetitive pricing affected sales. By the end of the financial year, the shares had fallen to 389p, barely half the 774p reached at the beginning of 1994.
Ignoring calls for his head, Sir Geoff put up the shutters at Kingfisher's Marylebone Road headquarters and started hammering out a plausible recovery story. In the last week or two he has emerged blinking into the sunlight to tell the tale, the part relating to problem child Woolworths anyway.
A four point plan to put the wonder back into Woolies now involves focusing its 780 branches on home and family products, keeping prices low and segmenting the chain into three different types according to location.
All well and good but the worry persists that Sir Geoff is still not addressing Woolies' core problems, the most pressing of which is that many of its core products are offered in greater depth elsewhere. In toys it is up against Toys 'R' Us and Argos. In childrenswear it battles against a rejuvenated Mothercare and an improving Adams. In entertainment, competitors include WH Smith and the supermarkets are increasingly turning their attention to CDs and videos.
Analysts also fret that Kingfisher's management now has so much on its plate that resources will be stretched to breaking point. The loss-making Comet electricals chain is being moved back to lower price items after last year's mistaken foray upmarket but still faces a cut-throat sector. The DIY market is still tough going for B&Q and the implications of Sainsbury's takeover of Texas Homecare are still uncertain. Superdrug is doing well but it is dangerously exposed to the supermarkets and Boots.
Hoare Govett forecasts group profits of pounds 290m this year which puts the shares, up 2p yesterday to 456p, on a forward rating of 14.5. Given the continuing uncertainties, that is high enough.
Whitbread needs a brewing coup
Whitbread's shares, up by a fifth since March, took a breather yesterday, slipping 3p to 628p as the market got the jitters about rumours that the brewer and pub retailer was running its slide rule over 16 of the American Marriott chain's UK hotels.
Having secured itself a profitable niche in the fast-growing budget hotel sector, analysts questioned why the company was contemplating a move into the highly competitive three and four star market. And after a sequence of high-profile missed opportunities, alarm bells started to jangle about the company's 18 per cent share price premium to the rest of the market.
In the context of a tripling of earnings per share, and an almost doubling of that share price over the past three years, there appears to be an element of worrying for the sake of it here. We are happy to stick with this column's comments three months ago on Whitbread's retailing skills, marketing nous and efficiency.
But plainly things have not gone Whitbread's way since the spring. Having under-bid for Courage and lost out to Scottish & Newcastle in the chase for the Chef & Brewer chain, the company has now been pipped to the post by Bass in the race for the attractive Harvester pubs, concluded last week.
With a balance sheet sporting less than pounds 100m of debt on shareholders' funds of more than pounds 2bn, Whitbread is in danger of allowing caution to get in the way of the bold moves that it now needs to keep up with the pace in a rapidly concentrating sector.
Having worked wonders with Boddingtons, a Manchester brewer unknown a few years ago and now one of the country's leading beer brands, Whitbread desperately needs another brewing coup to boost its uncomfortably middling 12 per cent market share.
A bid for Greene King or Marstons would reassure the market that Whitbread has not lost its way. In the meantime, the shares, on a prospective price/earnings ratio of 15, leave little room for disappointment.
No attractions in Merrydown
Investors will be forgiven a wry smile over Merrydown's latest venture: an implausible drink, alcoholic lemonade, with an equally improbable name - Two Dogs. It is a fitting product for a company whose shares have spent the past five years in steady retreat from a high of 404p to yesterday's 79p, down 2p.
There was nothing unexpected about results from the tiny Sussex cider maker, but that is about the only good thing to be said for a loss of pounds 1.85m from sales of pounds 23.5m. After a loss per share of 17.9p, the final dividend was passed, leaving a full year total of 1p, which compares with 2.5p last year and 7p two years ago.
Merrydown is not alone in being hammered by a lunatic price war in the cider market, where a scramble for market share is undermining one of the drinks sector's only success stories. Unlike the much bigger, but flat, beer market, volumes of cider are growing fast, but a rash of economy- brand launches has undermined the pricing of premium products such as Merrydown's Original.
Pressure on prices, which has seen the cost of a litre of Original fall from pounds 2.59 to as low as pounds 1.99, squeezed profits from continuing businesses to pounds 550,000, half last year's level. A bigger loss from Martlet Natural Foods, a previous failed diversification, wiped away a further pounds 250,000; stock write-downs and reorganisation accounted for another pounds 2m.
Merrydown has pinned its hopes on a distribution agreement with Whitbread. As a tiny company battling with the drinks industry titans, that makes sense, but you can be sure Whitbread is exacting a serious price for its efforts.
Too small to compete effectively in a consolidating industry, Merrydown is heavily borrowed, has no yield support and has failed to tempt a bidder. Even after their slump, the shares have no attractions.
Turnover pounds P/Tax pounds EPS Dividend
Adam & Harvey Group (F) 49m(42.1m) 6m(5.7m) 84.7p (77.6p) 13.5p(11p)
APTA Healthcare (F) 6m(-) 859,000(-) 1.2p (-) 0.5p(-)
Excalibur Group (F) 64.1m(54.4m) 2.05m(-1.6m) 2.3p (-2.7p) 0.45p(0.38p)
Halkin Holdings (I) 14.25m(11.4m) 1.45m(1.25m) 2.43p (2.46p) 0.25p(-)
Merrydown (F) 23.5m(25.6) -2.7m(-2.8m) -17.85p (-22.76p) -(1.5p)
(Q) - Quarterly (F) - Final (I) - Interim
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