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Shrinkage at Courtaulds Textiles

Investment Column
The demerger of Courtaulds Textiles in 1990, which seemed to promise shareholders so much, seems to have run out of steam. From 270p on demerger, the shares ran up to 600p in March 1993 but have performed unimpressively ever since. They fell 7p to 469p yesterday, as the company announced pre-tax profits of pounds 6.4m for the six months to June, marred by a pounds 3.9m exceptional loss relating to the sale of two retail businesses.

The Contessa lingerie chain has been sold to Stephen Hinchliffe's Facia group, which now includes Salisbury's and Sock Shop. McIlroy's, a chain of 30 department stores, was sold to Mackays Stores, a Scottish retail group.

With the high-street businesses out of the way, the company is now focused on clothing and fabrics. Most of the own-brand sales go to Marks & Spencer, which accounts for a quarter of group sales. The branded sector includes household names such as the Gossard Ultrabra, Jockey Y-Fronts and Lyle & Scott knitwear. Gossard lost the Wonderbra franchise to Playtex some time ago, but its Ultrabra replacement is performing well, particularly in the export market.

Courtaulds Textiles faces two key problems at the moment. The first is high-street uncertainty. M&S may be a blue-chip customer, but it can also exert considerable muscle on suppliers' prices if the going gets tough. The pain shows though in the figures. Own-brand sales, such as underwear sold to M&S, increased by 13 per cent but profit fell by 10 per cent to pounds 4.5m.

The other problem is rising raw-material costs. The price of cotton has rocketed over the past year after crop failures in Asia. Synthetic- fibre prices have also been rising, and Courtaulds Textiles has been struggling to pass the increases on to retailers.

The company continues to invest in the business and will spend pounds 60m this year, including pounds 20m in China, updating technology in knitwear and hosiery. Much, however, depends on the second half, which now accounts for around three-quarters of group sales and profit. What chief executive Noel Jervis wants more than anything is a chilly autumn to send people dashing out for warm undies and socks. He is unlikely to receive any help from the economy unless pre-election tax cuts ride to the rescue.

UBS is forecasting full-year profits of pounds 53m, which puts the shares on a forward multiple of 12.6. Unexciting.