Fool's Eye View

[ April 11, 2000 ]

Trouble booked for Ottakar's

By Maynard Paton (TMFMayn)

Carburton Street, London -- The Tuesday morning Fool's Eye View slot is fast becoming a soapbox for me to hammer home the underlying investment principles about retailers. After last week's slating of Clinton Cards (LSE: CC.), I now will turn my attention to another troubled High Street operator, the book retailer Ottakar's (LSE: OKR). Of course, if you're the proud owner of the Motley Fool Industry Focus 2000 (only £17.50!), you will already know why I have a particularly strong aversion to the General Retailer sector.

As I mentioned last week, the main reason for my distaste for this industry is that there's just too much competition on the High Street for any sustainable competitive advantage. If you happen to find a winning product that sells well, say a certain type of dress, greeting card or sofa then the merchant next door is more than likely to be able to get his hands on that item as well. And then sell it cheaper than you. And for a long-term investment, a company constantly fighting on price to differentiate itself from its rivals is not a recipe for a long-term investment.

But of course, in these dawning days of the so-called "new economy", the threat of competition isn't just from the competitor at the other end of the shopping centre. Oh no, these days, the threat is from cyberspace. And one particular retail sub-sector under, probably, the greatest threat from e-commerce is book retailing. That "gorilla" of a company, Amazon.com (Nasdaq: AMZN), is doing its best to alter the way the public buys books forever. Rather than leisurely mooch around your local bookstore, have a quick flick through your potential purchases and then take the books home with you, now you can surf over to Amazon, look at the cover of the book, read a few reviews before ordering and then wait a few days for delivery. Of course, you do save a couple of quid with Amazon.

Anyway, the Amazon way of selling books does appear to be catching on. And the effect has been damaging on the traditional Ottakar's trading performance, as witnessed by a profit-warning or two in the last year. Ottakar's floated in April 1998 and indeed, flotations are an investment warning sign in itself. When an owner, who knows more about the business and its future than anyone, determines the valuation of his own company for a sale, then its unlikely the buyer will be getting an exceptional deal. So it was, perhaps, with Ottakar's, the threat of online e-commerce looming large in the proprietors' minds. After peaking at 260p soon after flotation, the shares have crashed to around 60p before today's annual numbers for the year ended January 2000.

So what of today's results? A 21% increase of trading retail space led to sales rising 27% to £72.6m. Importantly, like-for-like sales held their head above water, to register a figure of 2.4%. But the expense of opening under performing new stores blighted the profit and loss account. Refurbishments and refits, and the launch of a new retail format, led operating profits to tumble from £3.3m to £1.7m. Earnings per share collapsed from 12.36p to 2.17p.

Ottakar's are, finally, venturing into the brave new world of e-commerce. Launched to "wide critical acclaim", their online trading site opened its doors last November. Interestingly, the company states that it is "particularly notable that a large proportion of our customers have chosen to collect online purchases from the stores". No mention of online volumes though.

As with most retailers, Ottakar's are struggling with their expensive "legacy" stores when trying to counteract their nimbler online counterparts. But slight glimmers of light may be at the end of the tunnel. Like-for-like sales growth was 10.2% in the 10 weeks to 8th April. Now normally, I would get quite excited about this type of announcement from a battered retailer. A fast recovering retailer can make for a rewarding short-term gamble. But although battered, Ottakar's just aren't battered enough for me.

Early morning trade saw Ottakar's shares slip 5p to 55p. On the results announced today, Ottakar's stand on a price-to-earnings ratio of 26 and a dividend yield of under 3%. Far too expensive for a retail recovery prospect, especially given the fact that there is still a hungry gorilla stalking the sector.

Any feedback on this feature can be directed to the Fool's Eye View discussion board.

Related Links
• Get well soon, Clinton Cards
• Ottakar's website
• Motley Fool Industry Focus 2000