Matalan sales rise lifts hope of Hargreaves bid

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Matalan unveiled its first rise in like-for-like sales in more than a year yesterday, boosting hopes of a 200p-per-share bid for the discount clothing retailer from its founder and chairman John Hargreaves.

The shares rose 7 per cent to 182.75p as the better-than-expected performance raised hopes of a £817m deal between the company's independent directors and Mr Hargreaves, who controls 53 per cent of the company. He and his backers, Barclays Capital, have made it clear they want to see how well the company's autumn ranges are doing before launching a firm offer. He reserved the right to make an offer of less than 200p a share should trading disappoint. He has until 11 October to formalise an offer or will have to walk away for six months.

But yesterday's figures - an increase of 1.3 per cent in like-for-like sales in the two months to 26 August - proved the retailer's recovery plans are beginning to bite. Eithne O'Leary at Oriel Securities said: "This trading statement makes it difficult for the independent directors to accept less than 200p. In our view, at this level Mr Hargreaves is still getting a bargain and shareholders should no longer fear for this company's future even if a bid does not materialise."

Defying rumours of a big drop, clothing sales were 2.1 per cent ahead, led by ladies' tops, shorts and dresses during a hot July - in particular the polka dot dress worn by the TV presenter Melanie Sykes at the relaunch of the brand.

John King, the outgoing chief executive, was careful not to use the "R-word" for recovery, saying the retail climate "is as tough as it was in the spring". But he added: "Matalan is a very strong and highly cash-generative business." The sales figures and an expected boost to working capital cashflow of at least £25m by the end of the year, resulting from newly negotiated payment terms with overseas suppliers, "show the resilience of the business", he said.

The retailer has overhauled its product ranges and is more than halfway through its five-year store refurbishment programme, with 18 stores refitted this year so far and another 12 to go before the end of the year, at a cost of £300,000 per store.

After an aggressive clearout in the homewares department, which pulled down gross margins in the first half, the retailer is entering the autumn/winter season with new products that represent more than half of its ranges, such as furniture - tub chairs at £99 and Louis XV chairs for £150.

Matalan is also moving away from selling single items, and is now offering discounts to try to turn around the homewares division, which makes up 20 per cent of group sales.

Matalan's second-biggest shareholder, Harris Associates, has indicated it would not be prepared to support a bid at even 200p a share.

But Nick Bubb at Evolution Securities said: "Our view remains that there will be enough signs of recovery this autumn for John Hargreaves to get the backing for his controversial 200p bid for the minority interests and that there is an 80-90 per cent chance of the deal going through."