View from City Road: Biting the bullet on sale of Silo

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The Independent Online
STANLEY KALMS, chairman of Dixons, was quietly confident yesterday that the loss-making Silo chain in the US can be turned around. It was all strangely familiar. He said the same thing 12 months ago. Since then, six-month losses have worsened from dollars 18.7m to dollars 26.2m. The deficit could hit dollars 36m in the full year. That is on top of a dollars 40m exceptional cost of closing 45 stores in the Midwest and sacking 550 people. Dixons paid dollars 320m for Silo in 1987 and losses since then have now overtaken profits.

Mr Kalms says even considering writing off the whole investment is 'negative' and 'not part of our thinking process'. But he should be weighing up that option. Maybe he is right to persevere with Silo, but it would be irresponsible to ignore the alternatives.

One of these is to sell what is sellable and close everything else. The balance sheet impact would be very painful - perhaps a dollars 300m write-off, which compares with current assets of dollars 525m. But the cash cost would be much less - perhaps dollars 100m. The dollars 7.5m financing cost of this outlay starts to look attractive beside the dollars 30m-plus trading deficit possible for the next year or so.

Biting the bullet is difficult, especially at this point in the economic cycle. Mr Kalms may become a laughing stock if things quickly pick up. Boots and WH Smith have a similar decision to make about their loss- making DIY chain, Do It All. In a smaller way Argos will soon have to make up its mind about its Chesterman's furniture stores.

At home, Dixons continues to shine. The move to out-of-town superstores by Curry's has brought handsome returns. Strong sales increases were achieved at the expense of a slight narrowing of margins. Interim pre-tax profits for the 28 weeks to 14 November were pounds 14.2m, compared with pounds 17.5m last time. The dividend was held at 1.6p.

Both UK chains look well-placed to benefit from a recovery in spending, though the planned price rises of up to 20 per cent in the next few weeks - the downside of sterling's devaluation - may hit sales volumes. After including a pounds 10m profit on the final phase of the Beaulieu office development in Brussels, full-year profits should reach pounds 90m, thanks to the strong Christmas trade. Sales in the past eight weeks in Dixons and Curry's are 17 per cent ahead. After yesterday's share price fall from 254p to 225p, the group sits on a prospective multiple of 18. Until there are clear signs that Silo is being successfully tackled, the shares are best avoided.

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