The Investment Column: Decision time over Burton

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The Independent Online
It is nearly make your mind up time for shareholders in Burton Group. The demerger of the Debenhams department stores will take place in a month's time and investors, who have already been advised by this column not to sell ahead of the split, now need to decide whether to hang on to shares in Debenhams, the remaining multiples business, to be renamed Arcadia, or both.

Following the demerger, shareholders will receive two Debenhams shares and one Arcadia share for every eight Burton shares held. After yesterday's publication of the listing particulars, analysts were upgrading their estimates of the relative valuations. Some are targeting a price of 172p for the two parts, compared with yesterday's closing price of 143.25p, up 2.25p. They value Debenhams at 112p - a 15 per cent premium to the market - with Arcadia accounting for the remaining 60p. The choice for investors is between Debenhams, a highly rated business with a solid track record, and Arcadia, which potentially has more upside but also carries more risk as its record is patchy.

Debenhams certainly looks the safer bet. Its margins are already running at 10 per cent and every additional percentage point gained adds another pounds 10m to profits. The chief executive, Terry Green, reckons there is much more to go for. He plans to boost profits by rationalising the supplier base as well as cutting back on discounting to spend more weeks of the year selling at full price. A pounds 350m capital expenditure programme will pay for 10 new stores in the next five years and upgrade the remainder of the 88-strong chain.

At the multiples business, which includes Top Shop, Principles and Dorothy Perkins, the challenges are greater. Margins are only 5 per cent and the chief executive, John Hoerner, is likely to shuffle the store portfolio by converting less profitable formats into the fledgling Racing Green brand. Mr Hoerner also wants to shift selling space towards womenswear, which already accounts for 60 per cent of sales.

The challenge will be to avoid the problem which has dogged the multiples in the past, which is that whenever the difficulties of one format are resolved a fresh set of troubles seem to emerge elsewhere.

So hang on to shares in Debenhams, even though the valuation could soon look quite full. Arcadia, with its weaker brands, is more for braver souls who are seeking a recovery play.