Market cuts the big boys some slack as retail bucks the trend

Debenhams provided an encouraging curtain-raiser to a spate of seasonal results reporting in the retail sector on Monday, by posting a 16 per cent rise in interim pre-tax profits at 77.1m, a nice little premium on the 72m to 76m range that the City was predicting. These were the first results from the group since it demerged in January – the old Burton Group, now re-dubbed Arcadia, reports on Thursday, after I have penned this – and are encouraging in the light of a dismal retail Christmas.

I have long believed that, while attention will inevitably focus on the retail brands in the altogether racier Arcadia, there may be life in the old department-store dog yet. Debenhams’ shares, up 24p at 372p in the wake of the results and in a falling market, aren’t yet soaring like a swallow and, even if they were, one such swallow would hardly constitute a high summer for retail shares. But two implications arise from the results – Debenhams itself may repay investors’ patience and, more broadly, that may mean that the retail sector is a better longer-term bet than the City is usually willing to stake, especially if pearls such as Boots are separated from swine such as Sears.

City analysts have it that Debenhams is in for a tough five years and, unremarkably, that the growth of the past five years is unsustainable. Fair enough – we can’t argue with that. But, in an often unremittingly dull market, it’s also worth focusing on the bull points that go alongside the Debenhams results. Sales are up 7.8 per cent, earnings per share are up 17.4 per cent and margins have improved fractionally from l0.2 per cent to l0.6 per cent. Debenhams is also opening 16 new stores, creating at least 6,000 new jobs – a level of investment that it considers a strong indication of its confidence in the future.

As the City indicates, that confidence is going to be tested over the coming five years. We shouldn’t be too quick to adorn the management of Debenhams with laurels. But nor should we consign the retail sector to an extended probationary period. It needs investment and, if we don’t identify the pearls, then those who predict a collapse in the value of retail shares, will be vindicated by their own self-fulfilling prophecy.

Take Boots, whose shares have been actively traded in the 920p-940p range this past week against a high for the year of 990p. Boots reports a financial year to end-March, is consequently in closed season and we will be hearing in the near future what its management, led by chief executive Lord Blyth, has to make of its prospects. But, unencumbered by the immediate excitements of short-term performance and what the share price does in response, it is worth looking at Boots as a paradigm of longer-term retail analysis.

Boots paid some 900m for Ward White at the start of this decade – something of a pig in a poke. It included brands such as Halfords, AG Stanley and Payless. I visited Ward White in the US in 1989 and rather felt that there was an unguided enthusiasm for purchasing ordinary chains of motor-spares chains – in short, the management thought America was the place to expand but was unsure why. Its acquisition by Boots demonstrated that there was a lot more talk than delivery in Ward White.

Since those days, we can now record that Boots grasped the nettle by selling AG Stanley, enhanced the offer and earnings of Halfords and folded Payless into Do It All, which it bought from WH Smith for a quid. These residual businesses are now doing quite nicely, after a period in which many pundits, myself included, kicked Boots tyres and drew air through our teeth. Even DIY has looked up as a market – and if that is down to luck, then Boots has made its own.

Boots has, apparently, identified an “incremental” customer that has moved from the high street to more convenient out-of-town locations. It is one of the more intelligent developers of the out-of-town offer, commissioning detailed analysis of the effects on high streets of actual, rather than theoretical, developments. Boots’ format and market-offer would seem to suggest that, in terms of medium-term earnings growth at the very least, it is cutting it.

I have considerable sympathy for those in the City who are constantly accused, usually for a variety of short-term political reasons, of being short-termists. Whenever they sell a share, institutional fund managers run the risk of being so accused. As one of them recently pleaded, every market day is the end of a ten-year period and it is the job, nay duty, of these dealers to make profits on behalf of their clients.

But it should also be said that there is a herd instinct in the investment industry that does not necessarily take account of long-term issues and exceptions that prove rules. I’m not saying that the likes of Debenhams or Boots should be thrown undue slack, but I am saying that the lessons of recent history demonstrate that the most money is to be made out of those with the talent to buck trends.

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