The Investment Column: Smith's strategy looks sound
Friday 30 January 1998
Yes, negotiations to sell Waterstone's to EMI are continuing, the management said. And yes, further funds may come from the sale of Virgin/Our Price, subject to contractual wrangling with its joint venture partner. And yes, funds from disposals are likely to be returned to shareholders. But the management didn't want to talk about any of this yesterday.
They were keen to demonstrate that after all the distractions of Bill Cockburn's departure and Tim Waterstone's pounds 1bn offer, they are focusing on the nitty gritty of getting their continuing businesses right.
The main priority is the core high street chain. A like-for-like sales increase of 5 per cent over Christmas is a decent performance, though around 2 per cent of that came from the new loyalty card which will hit profits by pounds 2.5m this year. It is also curious that magazine sales have been so strong that they have diluted the margin mix.
But the strategy looks sound enough. With the January sale now out of the way Smith's will concentrate on its books, news and stationery markets. For example, Smith's will squeeze an extra 50 per cent more titles in its magazine racks with only 12 per cent more space, thanks to a new racking system.
The basics of retailing are being attended to. There will be more emphasis on stock control and margin management. And almost 90 stores are to be upgraded with the refits delivering sales uplifts of around 6 per cent. Not a high figure, but a start. Under-performing lines like ice lollies and sandwiches have been stopped. Easter eggs will not be sold this year because Smith's can't make any money from them.
There is a long way to go yet but at least the share price is heading in the right direction. Since Richard Handover became chief executive in September, Smith's shares have improved from the 370p-380p mark to 437.5p, up 9p yesterday. SG Securities even has a target price of pounds 5.
On an upgraded full-year forecast of pounds 145m, the shares trade on a forward rating of 13. Future improvement depends on the core chain but at these levels the shares are reasonable value.
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