Retail prospects look promising

After a tough 1995 on the high street when retailers were hit by a combination of unseasonable weather, fragile demand and tax cuts that failed to materialise, the prospects for 1996 look more promising. It could be a good year to invest in stores groups for a number of reasons.

Consumer spending should receive a boost from lower interest rates and tax cuts, which will increase disposable incomes. Then there is the pounds 7bn flood of accumulated interest that will pour out of Tessas due to mature over the next few months. Although the original capital from Tessas can be reinvested, much of the interest is expected to find its way into the stores.

But retail analysts such as John Richards at NatWest Securities warn against expecting retailers to cash in on a mini-retail boom. Given the over-capacity on the high street, particularly in fashion, footwear and DIY, competition will remain fierce and margins tight.

It is also likely to be tougher to make money on the stock market in 1996 that it was last year when the FTSE rose by 20 per cent. Predictions for this year are for around 10 per cent growth. Investors need to be highly selective when making their choices for the year and as usual it is not so much a question of picking the sector as picking the stock

In spite of the tough conditions last year, a number of retailers turned in spectacular performances with Next, Burton, Dixons and Argos leading the way. With the good news already in the price of most of these stocks, investors may have to look elsewhere for the best returns.

At the lowest end of the risk-reward equation, larger stocks such as Marks & Spencer and Great Universal Stores should do well though are unlikely to set any pulses racing. M&S shares underperformed the market last year - with a rise of just 13 per cent - but in a competitive market will always lead the way. GUS is still a lumbering giant but has the added stimulus of a new chairman in Lord Wolfson, who has already helped David Jones rejuvenate Next.

This appointment may also add further sparks to Next shares which are likely to be buoyed by speculation about a GUS-Next merger.

Also tipped for strong gains this year is Storehouse, the BHs and Mothercare retailer which has improved margins and is now looking to add stores.

But to really maximise potential gains, investors who are prepared to take a risk need to identify those stocks that have underperformed but have the potential to turn the corner. Both House of Fraser and Sears fall into this category although they come with a health warning attached. House of Fraser shares have been dogged by the stock overhangs caused by the hot summer and mild autumn. Management has introduced better controls which should improve performance.

At Sears, Liam Strong is now taking more radical action to prune the group's disparate array of brands.

Another set of possibilities rest on any recovery in Britain's moribund housing market. Wickes, the DIY retailer is due for a re-rating after the sale of its building materials business. MFI also stands to gain from any signs of life in housing sales. Those to avoid include WH Smith, which has still to put last year's problems behind it.

Bridon warns it's on the ropes

What is most alarming about yesterday's profits warning from Bridon, the wire and wire-rope producer, is the speed with which last August's bullish trading statement has been turned on its head. The fall in the shares from 119p to 104.5p confirmed the market's annoyance at stumping up pounds 21.2m in a two-for-seven rights issue last summer at 135p.

Profits for the year to December just finished will now come in slightly under 1994's pounds 4.8m before exceptionals, well down on forecasts of pounds 7m to pounds 8m.

Price cutting by two main competitors in the US during the final quarter of the year forced Bridon to follow suit. Birkmyre, a non-core Australian textiles subsidiary continued to make losses. A major bridge contract was delayed and some deliveries were deferred into the current year.

It is all a far cry the new beginning which the company heralded in 1993 after Mr Petersen was brought in to revitalise a heavily loss-making business. "We know what we have to do. We know how to do it. We will do it", trumpeted a glossy brochure outlining Bridon's plans.

All is not gloom, however, although investors would be right to treat with scepticism the company's claim that it is about to reap the benefits of an investment program, new production methods and the integration of Schalkeseil, the German heavy rope maker whose acquisition was funded by last year's cash call.

On forecast profits of pounds 4.5m, the shares now stand on a p/e ratio in the high teens. A promised dividend of 4.4p provides some yield support, but the shares have a credibility gap to bridge. Unexciting.

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