Yesterday Somerfield(LSE: SOF) was spurred into making an early announcement about its current trading by a fall in its share price. The statement was very short saying that profits were expected to be at the low end of expectations if the current sales trend continued. The share price fell even further and the group got another mauling in the financial press this morning. Somerfield said a full announcement will follow shortly, by which they meant less than 24 hours.
This morning the group has released a full trading update and details of their strategic review. Put simply half the group is to be sold off. At the end of April 1999 the group had 1,422 stores, covering 12.5m square feet and with sales of a shade under £6b. Somerfield plans to sell off 350 stores in its Kwik Save division as well as up to 140 of its larger stores, loosely defined as those with over 10,000 square feet of floor space.
Somerfield has decided that it just cannot compete with the big boys in out of town retailing. They have decided to nail their colours to the mast in neighbourhood convenience shopping, where prices are not so competitive. These stores are in the accounts at an asset value of £550m. Whether they will fetch anywhere near this amount, as the group is effectively a forced seller, is open to question. But they should at least cancel out the group's net debt, which stood at £130m at the end of April.
The reason for the disposals can be seen in the group's latest sales figures. Overall the group reported a decline of 6.3% in like for like sales over the last 28 weeks. And the rate of decline is getting worse. In the first quarter it was 5.0% but in the second quarter is was an M&S-like 8.1%. But it appears to be the Kwik Save branded stores that are causing the damage. In the last quarter their like for like sales were down a massive 16.2%. In contrast stores with Somerfield fascia didn't do too badly with a decline of just 1.4%.
Once the disposals are complete the group will be left with some 850 shops that turned over £3b last year. Some 400 of these shops are still branded as Kwik Save and it is planned to accelerate their conversion to Somerfield stores. Whether this will arrest their decline in sales remains to be seen. Somerfield reports that stores that have been changed have produced considerably better sales figures. Unfortunately no timescale was put on the rebranding exercise. Given that only 70 stores have been converted since the merger with Kwik Save was completed in March 1998 it doesn't look like this a job that will be completed this millennium.
The group estimates that the neighbourhood market is worth some £30b, giving them a sizeable market share. Supermarket margins seem to be settling at around 5% of sales at the moment, barring any intervention from the Competition Commission. Will Somerfield be able to deliver as much as £150m per annum in pre tax profits from its remaining stores? If it could its current market value of £450m doesn't look overly demanding.
Plans relating to a share buyback seem to have been put on ice, as the group concentrates on its restructuring and investment into its remaining stores. Its chairman, Andrew Thomas, has announced his retirement and he will be replaced for the moment by Louise Patten, currently a non-executive, whilst a full-time replacement is sought. This will be Somerfield's third chairman in just over three years since it came to the market. Another board appointment is Kathryn Brown, who will be given the terrible title of Director of Change Management.
Somefield looks to be taking steps in the right direction, but it has a long walk ahead of it. The market's reaction was lukewarm in early trading with the shares falling 3p or 3.1% or 91p.
Other Breaking News
The two B's reporting their latest figures this morning. BT's (LSE: BT.A) were the best received of the two with the share price ringing up 39p or 3.4% to 1186p.
BG (LSE: BG.) said its latest results were held back by warm weather. Fancy that, warm weather over the months of July, August and September. Whatever next? The shares rose 3.25p or 1.0% to 338.25p.
Telewest(LSE: TWT) also put some numbers into the market this morning whilst confirming it was not in merger talks. The market sulked and awarded them with a small increase of just 1p or 0.4% to 285.25p.
Capital Radio(LSE: CAP) was another early mover, outlining its thoughts regarding digital radio in its latest results statement. Their shares fell 31.5p or 2.6% to 1175p.
Peacock Group, the discount clothing and homewares retailer, has set the price for its flotation at 140p to 170p. The mid price values the group at £150m. Up to 20.25m shares will be available to the public, with the minimum subscription set at £250. The offer closes on November 23 (you can register through their website) with dealings expected to start in December 2.
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