Problems Storehouse can't shelve

The Investment Column

The market is getting worried about Storehouse, the BhS and Mothercare retailer that also includes the Blazer menswear chain. Since Keith Edelman joined as chief executive three years ago, the group has concentrated on all the right things.

It has built margins rather than chasing sales, kept the lid on costs and sorted out the nuts and bolts of the business, including reducing the number of suppliers and shortening lead times. Distribution costs have also been addressed and will fall by a further pounds 3m this year.

It is a similar strategy to that employed by John Hoerner at Burton which has also seen its fortunes improve. Storehouse shares have responded to the treatment, rising from around 200p at the time of Mr Edelman's appointment to yesterday's 327p. The 21 per cent hike in profits to pounds 110m shows that the fruits of his work are coming through.

But the City is already looking to the next stage. With margins re-built and store refurbishment progressing, management must now drive sales which have been flat for more than five years.

Like-for-like sales fell 2 per cent across the group last year, with sales in the main BhS and Mothercare chains down. Mothercare had a particularly weak second half on the back of a weak clothing range and problems with product availability. Even these uninspiring figures are flattered by another stellar performance from Storehouse's overseas stores. Even including new openings, the group's UK sales fell by more than 2-3 per cent last year.

Though management is saying that boosting sales is the priority, this will be no easy thing as advertising expenditure will be cut this year after the high spends of recent years. The company hopes store refurbishments and the gradual maturing of new openings will be enough to kick-start sales.

There is also much to do at Children's World, the out-of-town group acquired from Boots earlier this year for pounds 62.5m. Next year's accounts will include exceptional charges of pounds 16m-pounds 18m to cover the integration programme which will include the closure of the Nottingham head office in September and possibly the closure of some stores.

The store names will not automatically change to Mothercare, even though the company perceives it to be a stronger brand. Mothercare World is a possibility, though the re-branding will not start until next spring.

The overseas stores are going great guns, with franchise sales having increased by 29 per cent to pounds 78m.

BZW is forecasting profits of pounds 125m this year, which puts the shares on a forward rating of 16. They are no more than a hold and there is probably better value elsewhere.