View from City Road: Misguided missile dents Dixons

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SILO, the American chain of electrical stores bought by Dixons for dollars 300m in 1987, is proving to be aptly named. News yesterday that it lost pounds 16.9m last year was the kind of explosion Dixons shareholders could do without. The shares shed 9p to 214p, further weakened by the gloomy current trading statement and a raft of extraordinary losses on UK property.

All Dixons' efforts are now going towards sorting out Silo. Attempts to make an acquisition in continental Europe have been put on the back burner.

John Clare, group managing director, is spending one week in four in the US trying to turn round the recalcitrant subsidiary. So far the results are mixed. Ominously, the declines in like-for-like sales, which were stemmed in the second half, have begun again.

Silo is being tackled from two directions. On the operations side, some functions are being centralised; individual stores are being given less leeway to discount; stocks are being more tightly controlled. At the same time Silo, which has 233 stores, is experimenting with special sections for small businesses.

Dixons warns that these tests will not yield results for some time. Meanwhile, a review of Silo's property portfolio could result in some costly store closures. Without an upturn in US consumer spending, Silo will probably stay in the red for a while.

Many British retailers have stubbed their toes on North America. Dixons still believes it can successfully transplant its UK trading skills across the Atlantic, though it acknowledges the markets are not identical. Americans are more price-sensitive than the British, and their appetite for 54-inch television sets and gargantuan cooking ranges and refrigerators poses special delivery problems.

Pre-tax profits of pounds 83m this year give earnings of 12.2p, putting the group on a multiple of 17.5. Judged against other listed retailers, that looks about fair given the strong UK results and the beguiling prospect of a pounds 10-15m profit on its Brussels property in the distant future. But investors should note the MFI factor, which may soon cast a shadow over the stores sector: if it is coming to the market on a multiple of about 12 or 13 times prospective earnings, why are poorly managed 'recovery' stocks still sitting on multiples of 18 or 19? The gap will surely have to narrow.

(Photograph omitted)