Shares: Textiles firms show their fibre

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The Independent Online
SQUEEZED between cost- conscious retail customers and foreign sourcing of materials from countries with low labour costs, UK textile companies might seem to be stuck in a secular decline, exacerbated by a prolonged cyclical downturn. The truth is more positive.

They have been through a tough time and are at a disadvantage against Far East suppliers on labour costs. But they can make money. What they need are managements that leave no stone unturned in cutting costs and improving service. There are big rewards for companies that do this, and opportunities for investors, because tough short-term trading conditions mean a lot of activity behind the scenes is only now starting to bear fruit. Three that have exhibited these qualities are the woollens group Parkland at 240p, Leeds Group, the specialist dyers and printers, at 503p, and the carpet manufacturer Tomkinsons at 325p.

Parkland is a classic recovery stock that was losing its way in the early 1990s, but is now being transformed by a talented and enthusiastic management team. Leeds is the ultimate quality play in the sector. It has a phenomenal 27-year record of rising dividends and a chairman, Robert Wade, with a genius for stalking acquisitions that turn out to be spectacular winners. Tomkinsons is an equally efficient operation that had a marvellous run in the 1980s but has struggled against fierce competition in an over- supplied market for the past four years, with profits way down on peak levels. Any hint of better trading conditions - and a convalescent housing market is a positive pointer - would power profits.

Parkland's transformation began three years ago with a series of key appointments in finance, production and marketing at what had been a family-dominated company. The family is still there playing a vital role, but it was the new chief executive, Bryan Lodder, who lit the blue touch-paper under the share price. He enfranchised the A shares in return for a four-for-five bonus issue to holders of the high-voting ordinary shares. As a result the price has roughly trebled in a year. But that still does not reflect the enhanced profit-earning potential of the business.

Important advances are electronic point of sale and new strategies by retail giants such as Marks & Spencer and Next, which are forging close working partnerships with their suppliers. Many investors are familiar with these relationships in the case of such garment makers as Dewhirst and Claremont, and M&S and Next have continued the theme. They buy material from fabric manufacturers such as Parkland, and this is then used by Dewhirst and Claremont to make up the garments. As a result, M&S and Next together are the final buyers of around 50 per cent of Parkland's cloth.

In the jargon, Parkland is transforming its profitability and prospects for sales growth by becoming much more proactive in this relationship. If you buy one of the new soft wools used in an unstructured suit from M&S or Next and find Wool 2000 on the label, that is Parkland cloth with a brand name they invented.

Similarly men's, women's and even children's blazers in a wide range of shades are made from high-quality barathea sourced from Parkland, whose barathea sales have surged from nowhere to a million metres at more than pounds 7 a metre in recent years.

The change in the sales mix is enhancing margins by pushing the average revenue per metre up from pounds 5.40 to more than pounds 6. And this effect has been reinforced by a revolution in productivity and quality control in Parkland's operations.

All this adds up to the prospect of several years of rising sales and improving margins. There is a long way to go, as the latest profit margins were only 3.4 per cent. Also, the effect of the improvements was disguised until recently by an upmarket suit-making business that was incurring heavy losses, and a fabric-printing operation that was grossly under-used. The suit-making business has been sold and the workload at the printing facility has now built up to impressive levels. As a result, a pounds 309,000 loss was transformed into a profit of pounds 970,000 for the six months to 27 August 1993.

Analysts are looking for pounds 1.7m for the full year and pounds 2.1m next to drop the price- earnings ratio into single figures. The shares look superb value.

In some ways, Leeds is a model for the highly efficient market-driven service business that Parkland is striving to become. Like both Parkland and Tomkinsons, Leeds is still finding the market tough and the newly published annual meeting statement talks of sales and profits only modestly ahead.

But that is classic Leeds style; the tortoise that carries on and usually produces a pleasant surprise when the figures are announced. And the company now has a whole new market to play for after its first acquisitions in mainland Europe.

Leeds suffered a setback in 1989 and took three years to return to record profits. Tomkinsons has been battling in a carpet market where there has been blood on the floor. Sales and profits collapsed in 1989 and have stayed flat ever since. But the latest report and accounts shows the usual rock- solid balance sheet and a cautiously optimistic statement on current trading.

The odds look excellent that the low point of the cycle has been passed and that there will be a sharp rebound some time in the next three years, hopefully sooner rather than later. On a dividend yield of 4.6 per cent, that should be worth waiting for.

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