View from City Road: More victims await the Asda axe

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The Independent Online
LONG-SUFFERING shareholders of Asda might legitimately inquire why, if things are as bad as yesterday's write-downs suggest, they were not told nine months ago when they stumped up pounds 357m of fresh money for the rights issue. Very few of the then directors are still around to explain. And the merchant bank advising at the time, SG Warburg, was replaced three months ago.

Things are not quite as bad as they appear. Archie Norman, the new chief executive, is using the new boy's prerogative of blaming his predecessors by throwing into the figures everything including the kitchen sink. Indeed, he is even counting 'kitchen sinks' that are three years away and may never materialise.

Even so, the property write-downs could have been worse. The pounds 189.9m write-off in the value of the stores is a net figure. It has been calculated after adding in a positive pounds 200m by revaluing older stores upwards.

The exceptionals mask a disappointing performance at the operating level. Operating profits fell from pounds 262m to pounds 180m. Like- for-like sales were marginally positive over the previous year, which means volumes were 5 per cent or so down. The group has been trying to cut prices since before Christmas, yet it has failed to achieve any gains in market share.

The experiment in discounting under the Dales format is little more than a management distraction, though the initial results are fair. The key must be to turn around the core Asda stores. Here, the new Asda team has little to show for itself so far, though it has achieved some gratifying results in another trial store by devoting more space to fresh food.

Despite the rights issue, net interest costs increased last year from pounds 90m to pounds 95m, as less interest was capitalised. Other supermarket groups rely on opening new stores to boost earnings. Poor Asda, still burdened with pounds 600m of debt, does not have that luxury, and its older stores take a pasting every time a Sainsbury, Tesco or Safeway opens in their catchment area. The only hope seems to be to whittle away at costs so that Asda can become more price-competitive. Mr Norman is not afraid of wielding the hatchet and is axing jobs at the rate of 10 a day. It is an unpalatable truth for his remaining 70,000 employees.

Until the results are more apparent, investors should continue to avoid the shares, which closed yesterday at 29.5p against a rights price of 35p.

(Photograph omitted)