The Investment Column: House of Fraser recovery in train

After years of what seemed like unending misery House of Fraser finally shown the green shoots of recovery in 1997. Its new own label ranges are taking off, some of its worst department stores have been revamped or earmarked for sale, stock problems have largely been eradicated and margins are on the rise. The City has embraced the good news and the share price which has had a great run.

But just as everything seemed to be going right HoF has come out with disappointing trading figures in the run up to Christmas and the shares fell more than 7 per cent to 203.5p. So is this a blip or is a warning sign that the HoF is back to its old tricks again?

Sales growth has slowed. Part of the reason is that HoF suffered from the downturn in the retail market in the Autumn and shoppers determination to leave Christmas presents to the last moment. The rest of the slowdown stems from the management's drive for margins, mainly through pushing their own fashion brands rather than relying on creaming off some of the takings from in-store concessions. Gross margins grew about one percentage point to 33 per cent, but this too disappointed some analysts who were hoping for faster progress.

The underlying message is that, along with the retail market as a whole, HoF's Christmas was nothing to write home about but was hardly a disaster. The share price fall looks harsh but the shares had flown too high too early on unrealistic expectations of the speed of HoF's reforms.

Societe Generale forecasts has left profit forecasts for the year to the end of January at pounds 28.5m, but has downgraded profits for the following year from pounds 37m to pounds 35m putting the shares on a prospective p/e ratio of 23 falling to 19. HoF is moving in the right direction but on this sort of racy rating the shares are no bargain.