The Investment Column : Thorn prunes prickly problems posed by Radio Rentals

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The Independent Online
Thorn has been such a dismal performer since last August's Thorn- EMI demerger that shareholders are probably grateful for small mercies these days. Shares in the Radio Rentals and Crazy George's retailer have halved from their 408p level immediately post-demerger, but yesterday bounced 10 per cent to 203p on news of a store closure programme at Radio Rentals and a shake-up of the US business.

The more hopeful move is the closure of 90 smaller, under-performing branches of Radio Rentals. It will involve a one-off cost of pounds 10m but should then yield savings of pounds 6m a year.

But the US strategy looks extremely optimistic. The US rentals market is so volatile that only 40 per cent of customers stay with their agreements for more than six months. This high churn rate - far higher than in the UK - saddles Thorn with costly collection and refurbishment bills it is willing to do almost anything to cut. The Holy Grail is customer loyalty and Thorn is bending over backwards to achieve it through discounts which are unbelievably generous. One scheme, called the "6/50" entitles anyone who remains loyal to Thorn for more than six months to a 50 per cent discount on their rental deal for the remainder of the contract. Though this will have a severe effect on margins, the company hopes to recoup the difference by winning more customers and persuading them to stay longer.

The difficulty for Thorn's management is that, although the market responded positively to yesterday's actions, they do not alter some of the key underlying problems facing the business.

The most serious is litigation against the company in the US, where several US states are claiming customers have been charged inflated interest rates in Thorn's rental agreements. Meanwhile, at home, Thorn is resigned to the introduction of the insurance premium tax, proposed in the last Budget.

This could cut pounds 10m from Thorn's UK profits as the sale of warranties to customers at the end of the rent-to own contracts has been a lucrative business. Add to this the impact of sterling's strength and weak trading both here and in America and it all adds up to sorry tale.

The US rentals market has fallen by 3 per cent on a like-for-like basis this year as cut-throat prices from electrical retailers mean customers can afford to buy their gadgets rather than rent them.

All this is a long way from the glitter that was promised when Thorn was decoupled from EMI, a business that is not doing too well either.

Back then some analysts thought Thorn's rather dull rentals business might prove more attractive than its more glamorous sister.

Assuming Thorn makes its full-year forecast of pounds 170m, the shares trade on a forward rating of less than 8. The low rating reflects the group's difficult position but the company's bruised shareholders are probably best advised to hold on for some kind of recovery.