House of Fraser profits flattered by acquisitions

The perennial bid target did reveal that returns from its four newest stores - in Croydon, Dublin, Maidstone and Norwich - have missed internal targets. But it comforted the City with an improving sales and gross-margin trend, and shares in the group rose 3.25p to 118p.

John Coleman, the chief executive, was less downbeat than his counterpart at Next this week, predicting a better second half for the retail sector. He said the group was trading ahead of expectations. "I'm cautious about the first half but I think conditions will improve into the second half," Mr Coleman said.

Although like-for-like sales were down 1.3 per cent in the first seven weeks of its financial year, the group had budgeted for a fall of 2 per cent. Excluding the distorting effect of a later Mother's Day this year, Mr Coleman said underlying sales were broadly flat.

The company has ditched some of its more expensive brands in favour of cheaper ranges to persuade shoppers to part with their cash. The strategy worked well over Christmas, when the group achieved a strong rise in like-for-like sales. In the year to 28 January, House of Fraser reported a rise in profits before tax and exceptional items of 4.6 per cent to £27.3m.

But without the contribution of about £5m of profits from Jenners and Beatties, the groups it purchased last year for £120m, its profits would have dropped. Some analysts criticised the group for not giving a more precise breakdown of its profits. Its accounts show only that underlying retail profit fell £2.3m to £20.9m. Mr Coleman said: "Of course profits would have gone backwards without Jenners and Beatties. The whole sector saw profits go backwards last year unless they did something to compensate, like opening new space."

Apax dropped its takeover approach barely two weeks after it emerged that the private-equity group was interested in bidding for House of Fraser. Mr Coleman, who was sounded out to lead the Apax bid team, said the approach was "very preliminary".

He declined to comment on whether he felt the City undervalued the department store group. He said: "We're kind of used to it [being a bid target]. We've had several dalliances in the past."

Several analysts suggested House of Fraser has too complicated a business to appeal to private-equity firms. "If I'm confused about how they make their figures add up, Apax could be excused for feeling a bit unclear," Nick Bubb, at Evolution Group, said.

House of Fraser said acquisitions were off the agenda while it finished integrating Beatties. It has extricated itself from Beatties' loss-making flagship Birmingham store at a cost of £8.6m. It offset much of the cost of buying Jenners and Beatties by selling off the freehold property, paying a net £34m for the two groups.