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Pic 'n' mix shares in Woolies.

Byline: Elaine Hardcastle, Special Correspondent

One of Britain's best-known High Street names, Woolworths, becomes independent today but may find its shares are not as popular as its 'pic 'n' mix' confectionery counter.

Sweets, toys and music retailer Woolworths Group is being spun off from parent Kingfisher.

Kingfisher shareholders will receive one Woolworths share for every one Kingfisher ordinary share held.

Professional investors are sceptical about the company's prospects despite the pounds 2.5 billion turnover it delivers annually from 900 stores.

The company's recent trading record gives them little confidence as operating profits fell 25 per cent last year amid intensifying competition.

Financial bookmakers Cantor, IG Index and Financial Spreads predicted last week the newly-floated Woolworths would be valued at between pounds 330 million and pounds 400 million or 23p to 28p per share after the first day of trade, some way short of initial estimates of pounds 400 million to pounds 500 million or 28p to 36p.

Teather & Greenwood analyst Rowan Morgan predicted Woolworths would endure a hostile reception as large investors such as tracker funds - ones that invest according to a firm's market capitalisation - head quickly for the exit. One of Kingfisher's biggest shareholders, who will be receiving 'free' shares in Woolworths on a one-for-one basis, said they did not intend to hold on to them and would only consider picking them up if the price fell to 22p to 23p.

Another top shareholder said it was keen to take a stake but not immediately. 'Once the other institutions have dumped the stock, we'll step in,' the fund manager said. Mr Morgan reckons after the selling has subsided brave investors should look to buy the stock at the 20p to 22p level.

Woolworths, originally part of a US chain of the same name, has been part of Kingfisher for nearly 20 years.

Its US namesake closed its doors some years ago and Kingfisher's desire to concentrate on faster growing consumer electronics and home improvements leaves Britain's Woolworths orphaned again. In many of the markets it operates Woolworths has an enviable position. It is unique on the British high street, well-known for its 'pic 'n' mix' confectionery counter but with a product range that spans gardening equipment and kitchen equipment.

It is a leading retailer of entertainment products where items like videos and CDs contribute 40 per cent of group turnover.

Christmas is therefore crucial to the company with the fourth quarter generating 80 per cent of operating profits.

Success in this area has come at a cost. Competition from supermarkets expanding into non-food areas means Woolworths biggest product category now offers the weakest profit margins.

Woolworths dominates the pounds 5 billion confectionery market.

It is second in homeware and first in toys. Its Ladybird brand has helped it become the UK's third biggest childrenswear retailer, behind Marks & Spencer and Mothercare. But is that enough?

'The institutions that bought into Kingfisher as a growth stock are not the type of institutions that want to hold Woolworths. There will be a flood of sellers but the buyers will be biding their time,' said one analyst. Deflated price expectations reflect nervousness about the company's prospects. Over-optimistic buying has left Woolworths with masses of unsold stock.

Its IT systems badly needs upgrading and expansion plans have had to be scaled back. Furthermore, there will not be a permanent chief in place until next year.

'We are also expecting a thumping great loss at the interims in September,' another analyst said. Ahead of the demerger, Kingfisher admitted that underlying sales at Woolworths took a turn for the worse in July. It said efforts to shift stock along with higher operating costs and margin pressure on entertainment products had a significant impact on profitability in the first half of the year. It warned these factors will take pounds 15 million off profits this year.

Before shareholders can think of Woolworths as a recovery stock, its underperformance must be halted.

But if the price slumps, there may be a bargain to be had.

Analysts expect profits of around pounds 43 million this year but they think profits could jump to pounds 80 million next year.

'Currently there is little confidence in forecasts, but if those forecasts can be achieved you can arrive at a share price valuation of 40p,' said one of the analysts.

Analysts have found it tricky to value Woolworths given its wide range of competitors such as Boots, Mothercare, Toys R Us and HMV. Woolworths seems to be an amalgam of them all.

Some analysts have chosen WH Smith, the books and stationery chain as the best comparison. It has a similar high street presence and diverse product range. Others compare with GUS, owner of the Argos retail chain which sells homewares and toys from catalogue-based stores.

Both retailers are trading on a price-earnings multiple less than the retail sector average and analysts reckon Woolworths deserves a discount of 15-25 per cent on top of this due to its weaker earnings outlook.

Broker CSFB thinks Woolworths deserves to be rated on an earnings multiple of 11-12 times, giving a 28p to 32p share price.

The average for the sector is 15.5 times and at this valuation the current indicative price looks 'cheap'.

'We genuinely believe there is a good opportunity to make money here,' another leading broker said. 'It should not be forgotten that most of Woolworths' problems are of its own making and can be fixed. The revenue line is growing and people are still visiting the shops.'

While an independent Woolworths run by former Railtrack Group boss Gerald Corbett will focus on general merchandise retailing in the UK, Kingfisher under Sir Geoff Mulcahy plans to concentrate on becoming an international do-it-yourself and electrical retailer.

City View, Page 19


Plenty on offer for shoppers and investors in the newly independent Woolworths
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Publication:The Birmingham Post (England)
Date:Aug 28, 2001
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