Stock taking before the Budget

The City is convinced that the gloom surrounding the high street will soon be lifted and give retailers the boost they have been looking for. This year has been an erratic one for retailers, with little clear evidence of a recovery. The hot summer ruined many retailers stock forecasts, and mild autumn weather has hit winter clothes and home entertainments.

With the election drawing closer, economists are expecting the Government to “bribe” the electorate with between 2bn and 5bn in tax cuts. The first news should come next week with the Budget.

Unemployment is climbing again and retail sales for October are depressed. Analysts are changing their prediction that there would be no cut in interest rates, as the Bank of England comes under pressure.

Retail share prices have rocketed in the past week on the expectation of lowered interest rates. “All bad news is good news at the moment,” says Ian McDougall, analyst at Williams de Broë “Every piece of bad economic news adds weight to the argument for cutting tax and lowering interest rates, which will be good news for the stores sector in the long run,” he says.

The expectation of good things to come has propelled many store stocks upwards, and even poorer performers such as Kingfisher (up 32p on the week) and WH Smith (up 34p) have benefited.

WH Smith’s share price rise came on the back of news that sales rose eight per cent for the three months to September 2. This largely reflected strong sales at bookseller Waterstones, and Virgin Retail which runs Virgin Megastore and the Our Price chain.

A cut in French interest rates last week also gave Kingfisher a boost. Its French electrical chain, Darty, will make up to 40 per cent of the group’s total profits this year, accounting for some 115m out of a total 290m.

However, other news is less good for Kingfisher. In the UK, the Comet electrical chain is viewed as “troubled”, after dropping its commitment to “everyday low prices” and following Dixons’ lead by focusing on price promotion.

Dixons is seen as one of the best performers of the year. Over the past a three months, its share price has risen by a third. It has benefited from the closure of the Rumbelows chain earlier this year. “It has wiped the floor with the competition,” says one analyst. Dixons has followed a strategy of moving its Currys shops out of town and has held steady while its competition has been in disarray.

Among the clothing retailers, Next continues to surge ahead, and is one of the City’s most favoured fashion stocks. Meanwhile, Marks & Spencer is looking static. For the City, M&S’s problem is that it has expanded about as far as it can in the UK, and there are continued uncertainties about how successful its foreign expansion has been.

Analysts cannot see where new growth will come from and the company’s share price has remained almost unchanged over the past three months.

Next, on the other hand, is trading strongly. The merging of its directory and retail ranges has increased the focus of its offer. And Next’s classic ranges are seen as more fashionable than corresponding ranges at M&S.

Burton’s move to slash the number of cut-price promotions has paid off in terms of margins – the group has reduced prices across its chains for a third of this year, compared with two-thirds last year.

But the group, which includes Burton’s Menswear, Top Shop and Top Man, Dorothy Perkins, Debenhams and Evans, will have to prove it can increase the volume of sales. It will need to refine its brands further to show that its improved margins can be harnessed to improved sales. Kleinwort Benson is forecasting pre-tax profits of 125m for the year to August 1996, up from this year’s 93m.

Stocks which analysts believe offer potential include Storehouse, which owns Bhs, Blazer and Mothercare. John Richards of NatWest Markets says: “Storehouse has the capability of growing – Bhs already needs more space.”

One of the big questions vexing the City is what will become of the House of Fraser, which owns DH Evans and Army & Navy. Panmure Gordon has slashed its cut forecast for this year from 28m to 23.5m on the news that costly store refurbishments are bringing in sales increases of only 4.2 per cent.

NatWest believes the chain is ripe for takeover thanks to a highly valuable asset – it owns its properties, 50 or so department stores in town centres around the country. This property portfolio renders it attractive to outside buyers. European and US department store chains are thought to be looking closely at HoF and even Sears is tipped as a suitor.

Sears, the stumbling giant of the high street with some 20 different fashion and footwear chains, has had little benefit from this week’s rise in store share prices. Analysts are looking for the group to exit from some its poor performing chains such as Olympus Sports.

An upturn in fortunes is expected some time next year, as tax and interest rate cuts begin to feed through to consumer spending. But even with continuing low inflation – it has dropped 0.5 per cent to 3.2 per cent – the outlook is still poor. Retailers love inflation – it allows them to raise prices without raising eyebrows. This Christmas will the next big indicator of consumer confidence. With Christmas promotions starting early this year, retailers think they could be in for a tough time.