Specialist shops stripped for action

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The Independent Online
IN THE 1980s investors went crazy for specialist retailers. Shares in such companies as Sock Shop, The Body Shop, Laura Ashley and the optician Miller & Santhouse were on sky- high ratings. Those days are long gone, and even reborn sector favourites like Next are comparatively modestly rated. But investors' enthusiasm for niche retailers is not illogical - when a format is working, the growth potential can be phenomenal. Just look at the proliferation of such international retail concepts as Benetton and Toys'R'Us.

Two recently floated UK retail specialists which should go a long way are the sports goods retailer JJB Sports, at 505p, and Oasis, at 224p, a chain selling womenswear for the 18-35s. Both are showing dramatic growth, with formats which are clearly working. Healthy cash generation offers the potential to grow these businesses to several times their present size without further equity funding. Long-term icing on the cake comes from fledgling international operations.

The success of JJB Sports is all the more remarkable in that the market leader, Olympus, part of the Sears empire, is not doing well and may be up for sale. The impression is that JJB is a much more efficient retailer. It specialises almost exclusively in branded goods from such market leaders as Nike, Adidas and Umbro. Prices are affordable to keep stock moving fast. The sales breakdown with the interim figures was clothing 33 per cent, replica kit 20 per cent, footwear 39 per cent, and equipment (tennis racquets, footballs and the like) 8 per cent.

Replica kit is a particular star on attractive margins. Football clubs change their strip with increasing regularity, stimulating burgeoning sales.

Founded by a former Blackburn Rovers player, David Whelan, JJB has increased its number of stores from 63 in 1991 to 145 currently. Average store size has grown as well, which has boosted sales from pounds 20m to an expected pounds 90m- plus this year, while pretax profits have grown from pounds 2.5m to last year's pounds 7.6m. For the current year, a Charterhouse Tilney analyst, Richard Crawley, is forecasting a further advance to pounds 12m for earnings per share of 25.8p and a prospective price-earnings ratio of 19.6.

A powerful factor in future growth is likely to be out-of-town and larger city centre stores. There are five such superstores at present, often partnered with successful high street outlets.

Richard Crawley believes that next year JJB could have one of the largest store opening programmes of any UK retail group, although JJB's finance director, David Greenwood, says ideas that JJB might add another 300,000 sq ft to its current 390,000 sq ft of selling space are over the top. Prospects certainly look good and longer-term growth could come from a pilot operation in soccer-mad Spain.

Oasis shares with JJB the characteristic of a highly successful format and a chain which should have plenty of room for further expansion. Growth has been explosive, from 17 to 81 stores and concessions, since brothers Michael and Maurice Bennett gained control of the business in March 1991. Not too dissimilar rivals, such as Next, have more than 220 UK stores.

Previous to running Oasis, the Bennetts, who began their retailing careers in 1949, founded the Warehouse chain of stores in 1975 and sold it to Freemans in 1986 for pounds 13.5m.

Michael Bennett says there is no magic secret; the group just tries to do everything well. The overwhelming bulk of its clothes are designed in-house, and the group is following customer demand into related areas including accessories, costume jewel- lery and swimwear.

Weather has been a factor, with a long, hot summer and a freakishly warm October not helpful. However, anecdotal evidence suggests that sales will become healthy presently. Robert Snaith at stockbrokers Societe Generale Strauss Turnbull, is looking for profits to 31 January next of pounds ll.3m, against pounds 9.2m, followed by pounds 13.3m, which would drop the p/e to 15 and then 12.7.

Store openings are planned at a steady rate, with perhaps 50 more to be added over the next four or five years.

Overseas stores have been opened under licence in the Middle East and Taiwan, with further openings imminent in Dubai and Hong Kong. The group has also signed an agreement with a German department store group, Kaufhof, where the two concessions opened so far are trading well. The hope is that the business in Germany could develop on similar lines to that in the UK, with stand-alone shops to address a significantly larger market. The shares look attractive both short- and long-term.