Sears’ management owes its shareholders a stronger profit

Unlike Argos, Sears has run out of excuses for its recent profits warning. It is time for the company’s management to take the rap, says George Pitcher. George Pitcher is chief executive of issue management consultancy Luther Pendragon

It is becoming increasingly apparent that retailers were not good little boys and girls during 1996, because Santa didn’t visit them at Christmas. Most found very little of what they had asked for in their stockings.

The retail sector’s shares are dropping like flies. Argos, something of a darling in the City lately, issued a profits warning last Friday that saw its shares dive some 15 per cent to 623p and pushed the catalogue retailer to the very edge of falling from the grace of the FT-SE 100.

The City, in its demanding wisdom, had been expecting double-digit growth on the previous festive season. In the event, Argos managed only four per cent. It duly acknowledged that pre-tax profits for the year are unlikely to exceed the lower end of City expectations, currently 140m. This, against a background of some retailers announcing that Santa had indeed been good to them – John Lewis posted a sales rise of 12.3 per cent for the 23 weeks to January 4, while jeweller Signet saw an increase of 8.6 per cent in the four weeks to December 28.

Nevertheless, such is the power of Argos, whose shares fell 17.8 per cent last week to 623p, that its bad news drew others in its slipstream. Marks & Spencer’s shares were duly off 17p at 465.5p and Next’s were down 22.5p at 529p.

The truth is that Argos, in market valuation terms, was riding for a fall: the shares have quadrupled in value since the company demerged from BAT Industries in 1990 and have been trading at a 40 per cent premium to other retail stocks recently. Argos had endeavoured to cool the City’s ardour last autumn, but analysts wouldn’t have it. Fair play to it for that. And I must say that I rather admire the Argos attitude that doesn’t give a stuff whether it falls out of the Footsie – what the City giveth, the City taketh away.

I admire Sears rather less. Just ahead of the sad news from Argos came the contemptible news from Sears that profits this year are likely to be lower than last year’s 100m. Analysts, who are beginning to grow accustomed to the habit, duly marked down the shares some 6.5 per cent to 88p, while downgrading their profits forecasts to between 80m and 85m, against previous expectations of an unchanged 100m and forecasts as recently as last month of some 120m.

There is no comparison to be made with Argos, other than that Christmas was a hard trading period for both parties. Argos, as I say, has recently outperformed the market by 40 per cent – Sears has, since 1992, managed to underperform the market by 46 per cent, while pirouetting through a series of restructures that have promised much and delivered little, if anything, to exasperated shareholders.

Nor can the latest setback be blamed wholly on the Christmas market: sales over the holiday period were 0.5 per cent down on last year, but the second half to January 6 saw a modest increase of one per cent.

The problem, we are told, is with British Shoe Corporation (BSC), where like-for-like sales fell 2.8 per cent in the second half, against declared expectations of an improvement. Freemans, the mail order business shortly to be sold to Littlewoods for 360m, also disappointed with a sales fall of 6.5 per cent (how pleased Littlewoods must be).

There have been plenty of excuses before – the wrong fashion ranges at Miss Selfridge, the collapse of the shoe interests to Facia and now the shoe market in general – but chief executive Liam Strong must surely have run out of scapegoats. The buck must stop at its traditional destination.

Last June, I wrote here, in the wake of the Facia debacle, that “shareholders are entitled to sound management from their management. Strong will have to reassure them of such judgement and he may be running out of time”. Facia, it will be recalled, was the curious retail concern run by the colourful Stephen Hinchliffe, to whom Strong believed that selling Sears’ shoe interests would be a cheaper option than closing them. He subsequently had to tell the market that the failed Facia group would cost Sears’ shareholders an extra 25m in exceptional charges, bringing the total to 74m.

I also said last June that there is an old poker-school saying that, if you can’t spot the sucker around the table, then it’s you. Strong appears to hold a different view. BSC must improve its performance by the summer, or Strong says he will break it up. There doesn’t appear to be any acknowledgement in this threat that, as chief executive, Strong might have a responsibility to sort it out himself. Meanwhile, like a poker player begging to stay at the table, Strong promises to return some 410m to shareholders by way of a special dividend from the proceeds of the Freemans sale.

Strong’s performance is no match for those struggling to maintain standards at Argos – or for John Hoerner, who took over Burtons at the same time in 1992 that Strong arrived at Sears. Strong may have inherited a poisoned chalice, but the time has finally come to drink from it.

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