Fool's Eye View

[ May 16, 2000 ]

ScS Furnishes Interims

By Maynard Paton (TMFMayn)

Carburton Street, London -- Do you have an investment vice? Or in other words, do you have an infatuation with those companies or sectors that you know just aren't particularly Foolish? For example, some investors still trawl the bottom of the penny share barrel, hoping for the next big winner in full knowledge of the perils that usually await them. Others dabble in unpredictable areas such as oil exploration or mining, dreaming of oil from Mongolia or diamonds from Peru.

But my investment vice is retailers. And small specialist growth retailers at that. TMFPyad calls this type of company "the small investor's graveyard". He's right. Retailing is a very unpredictable industry. Low barriers to entry and no proprietorial advantage always mean that if any merchant gets ahead of the pack with a new retailing concept, its lead will always be short lived.

But the rosy outlook that the stock market applies to every small expanding retailer undergoing a rapid growth phase, characterised by significant like-for-like sales growth, always amazes me. Even though stock market history is littered with these boom-and-inevitable-bust stories of retailing fads, investors always seem to think "this time it's different". One example of this rose-tinted phenomenon is a recent outbreak of Matalanamania.

Tickling my tastebuds

But where my investment tastebuds are tickled is trying to spot a rapidly expanding retailer before the stock market expectations become wildly optimistic. Aided by substantial like-for-like sales growth, fast growing retailers can always witness substantial short-term share price gains after the crowd catches on. It's not a very Foolish investment strategy, I know.

The added pitfalls of an inherently uncertain retail industry make it a very dangerous, but exciting, game to play. Perhaps it's the adrenaline feature that goes with this sort of investment that makes it so compelling for me. Of course, Foolish long-term investing and adrenaline don't mix.

Anyway, one particular retailer that has caught my eye lately is ScS Upholstery (LSE: SUY), a small furniture retailer that tabled its interim results this morning. In the six months ended 31st March 2000, turnover soared 29% to £21.5m but operating profits edged only 8% to £2.5m after increased short-term advertising and distribution costs. But the real key statistic to keep an eye on is the like-for-like sales performance. Are the sofas from ScS becoming ever more popular?

Well yes, but the accomplishments in the half-year are not earth shattering. Like-for-like sales growth of 7% during the period and a 9% figure being currently experienced are good, but not outstanding. The really fast growing retailers of the past have all had like-for-like sales growth well into double digits.

One more particular worry is comparing the ScS performance to that of DFS Furniture (LSE: DFS). Having the larger and established DFS manage an 18% like-for-like sales performance in their recent interim results, doesn't give me the impression that ScS has hit upon some sort of retail concept that has its bigger counterpart on the ropes.

And without that winning retail concept, ScS just isn't going to get my adrenaline pumping.

Related Links

• Matalanamania
• DFS -- Not Vanquished Anymore!
• Beware the specialist retailer

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