Storehouse slides into crisis

News Analysis: The Bhs and Mothercare group has added to the retail gloom with a profits warning, but is management to blame?

STOREHOUSE, the BHS and Mothercare retailer, yesterday became the latest victim of the consumer downturn when it reported flat profits for the half year to September and warned of a "sharp and sudden downturn" in the retail market in late September and October. The company said weak sales in current trading would lead to lower full-year profits than in 1997.

The warning, which follows similarly gloomy statements earlier this week from Safeway and New Look, pushed Storehouse shares down 17 per cent per cent to 134.5p, a six-year low.

As some analysts cut their forecasts for next year by as much as 30 per cent, some of the company's institutional investors were yesterday questioning whether the management team is equipped to guide the company through today's difficult trading conditions.

They are wondering whether Storehouse should really be seen as just another victim of the clothing "bloodbath" outlined by Marks & Spencer earlier this month, or whether there is a problem with the structure of the Storehouse board.

Keith Edelman, Storehouse's chief executive, has been under pressure for some time. Yesterday's share price fall means the shares have underperformed the stock market by more than 40 per cent during his five-year tenure. The company has also underperformed the M&S share price over that period.

One senior fund manager at one of the company's biggest institutional shareholders yesterday said: "This team has been there for some time and there must now be a question as to whether they have achieved what they set out to."

Mr Edelman joined Storehouse in August 1993 from Carlton Communications, the media group. He replaced the flamboyant retailer, David Dworkin, whose initial success at the company wilted in the last recession.

A businessman with a degree in management sciences, rather than a natural- born retailer, Mr Edelman was initially popular in the City as he set about rebuilding the group's balance sheet, restoring trading margins and improving profits.

But over the past year or two the relationship has turned sour. A research note by investment bank CSFB started the questions two years ago. Entitled "Good Enough?" it questioned the lack of sales momentum and the company's methods of calculating its costs.

The company has never restored this "credibility gap" in the City, and some investors are wondering whether only a change of management will help to rebuild relations.

Fund managers may now ask Alan Smith, the former Kingfisher and Marks & Spencer director, who is Storehouse's chairman, to review the board's composition.

One fund manager said: "Often with successful store groups, you get a businessman as chairman and a retailer as chief executive. At Storehouse, the combination is the other way around. Perhaps that is a problem."

However, Mr Edelman says he has no plans to step down, and the group's chairman, Alan Smith, says the current board will remain unchanged. Mr Smith said: "The business has made significant progress in its financial performance and in its development in the market place. But there is a disconnect between the performance of the business and the performance of the share price."

Storehouse blames its current problems on "gyrating" markets on the high street, which have led to volatile trading. It said its like-for-like sales were 7 per cent ahead in one week of current trading, but 14 per cent down in another.

It has maintained its margins, which are up by 1.4 percentage points, and has avoided the discounting which is already prevalent in many stores. However, this has resulted in poor sales figures as shoppers seek bargains elsewhere.

At BHS, same-store sales were up by 0.7 per cent over the half year but are down in current trading, with a sharp fall in September.

BHS has done well in home products and ladieswear but poorly in childrenswear, where rivals such as Next, Gap and Asda have all increased their children's ranges. As a result BHS plans to reduce the amount of space it devotes to children's clothing

At Mothercare, same-store sales are down by 1.7 per cent in the past five weeks, with sales of older children's clothing particularly weak. However, sales have been strong in hardware, toys, maternity clothing and babywear. In the six months to October, Storehouse's pre-tax profits were flat at pounds 38.5m.

Mr Edelman was apparently worried that he might be replaced by Stuart Rose, the former Argos chief executive, before Mr Rose was appointed to run the Booker cash-and- carry business in September.

The chief executive looked more tired than worried yesterday. "Am I enjoying today? No, I am not. But am I looking forward to getting back to running the business tomorrow? Yes I am."

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