Somerfield still has problems

The Investment Column

It is hardly surprising that Somerfield laid low for almost six months after what proved to be one of the most fraught new issues of recent times. David Simons and his fellow directors probably limped back to their Bristol headquarters severely bruised after their experience, if several million richer.

The cut price float was such a debacle that it made it all the more crucial that the company did not disappoint with yesterday's maiden set of results as a public company. Mr Simons even started his presentation with a slide showing the slogan "delivering the goods".

This was only partly the case. Though half-year profits of pounds 54.6m were in line with expectations and the margin increase to 3.4 per cent was also good news, the longer-term prospects still look poor.

The most worrying sign is the group's like-for-like sales performance, where sales in the six months to November were just 1.7 per cent ahead of the same period last year. With food price inflation running at just over 2 per cent, that represents a fall in real terms.

The problem is that though management tries to focus attention on the core Somerfield format, where sales were 4.3 per cent ahead, it is still being dragged back by the under-performing tail of old Gateway stores and the Food Giant discount format. Sales are falling off a cliff in both.

Dig beneath the surface and other problems emerge. Though the conversion of Gateway shops to the Somerfield format yields double-digit sales gains in the short term, they soon evaporate. Mr Simons admitted yesterday that in some of the original Somerfield conversions sales have started to go into reverse. For a company that is hoping to drive profits through higher sales that looks extremely worrying.

To be fair to Somerfield, it is doing some of the right things. It is moving towards higher-margin fresh foods and its Europartners buying consortium is helping keep costs lower.

Mr Simons is talking about home shopping trials and financial services but the fact is that rivals such as Tesco and Sainsbury are further ahead, have stronger brands and more funds. Somerfield is always going to be running to catch up.

Shareholders who were bold enough to apply for Somerfield shares last summer eventually got a very good deal at 145p. Though the shares dipped 5.5p to 168.5p yesterday, investors are still looking at a near 10 per cent gain. But that was the easy part. Further advances will be harder to achieve.

Brokers were shading down their full-year profit forecasts yesterday to pounds 100m this year and pounds 105m next. This puts them on a forward rating of just seven.

Braver souls may want to follow fund managers like PDFM and hold on for the long, long term. But it will be a stressful experience. Others should sell.