Fool's Eye View

[ June 13, 2000 ]

A Recovery On The Books?

By Maynard Paton (TMFMayn)

Carburton Street, London -- As a private investor constantly on the search for the next company to plough my hard-earned savings into, one problem that I have is to never revisit the companies that I've previously dismissed. Once I've made up my mind that the company is not for me, I find it's difficult to consider the company as anything other than a "no" from then on, even though things may have changed at the company a few months or years later.

This inflexible approach to investing was highlighted to me (again) by a post on the Ask A Foolish Question discussion board. Nicpound comments in this post on the possible recovery potential of Ottakar's (LSE: OKR), the High Street book retailer.

Ottakar's, like most other retailers, have had a tough time of late. Online competition and the runaway costs of opening extra stores have blighted the profits at the High Street merchant. Operating profits halved in the last reported year to £1.7m while earnings per share collapsed from 12.4p to 2.2p during the same period.

Having read my "not too complimentary article" covering those recent full-year results, Nicpound asks: "Would now be a good time to buy? Or is there real evidence that this is another bookstore that just cannot cut the mustard with other High Street and online competition?"

The query prompted me to revisit Ottakar's. As I gingerly mentioned in my reply to Nicpound "the forecasts have been revised and the share price has dropped, so perhaps Ottakars fits the bill now (as a potential recovery play)...?".

As you may already be aware from this feature, I'm quite partial to small specialist retailers, especially when's there's a short-term recovery in sight. With expenditure at a retailer largely static, staff costs and rent remaining the same regardless of how many customers come through the door, any additional sales can lead to greatly enhanced profits. And big increases in profits can equate to big share price movements. This operating phenomenon of retailers and the share price re-ratings to be had are both described in more detail within the Motley Fool Industry Focus 2000 (great value at only £17.50!)

The first sign I look for in any retail recovery proposition is the like-for-like sales performances. Chunky figures in this department usually mean that the company is definitely on the road to revival. And Ottakar's appear to score well on this point. At the preliminary results stage, the retailer announced that like-for-like sales growth was running 10% ahead for the 10 weeks to 8th April. The company's AGM statement announced last week adds further comfort by describing how the like-for-like performance had continued into June. And even more good news came in the comment that new and upgraded stores were generally trading ahead of expectations.

The factor that had originally put me off Ottakar's was the historic brokers' forecasts and the then share price did lead to a rather optimistic valuation. But things have changed. The shares have dropped from 55p to 46.5p, and the brokers have now pencilled in a prospective earnings per share (EPS) figure of 6.2p and anticipate a dividend per share of 1.9p in the current year.

Putting the current share price and estimates into the valuation pot, Ottakar's stand on a forward price-to-earnings ratio (P/E) of just 7.5 and have a prospective dividend yield of 4.2%. Looks cheap to me. In fact, Ottakar's look very cheap, with the positive sales remarks underpinning the upbeat broker predictions too.

At this point, a bit more research is required for me. A look through their annual report is necessary to ensure no hidden dangers are lurking deep with the accounts. And the big question mark hanging over Ottakar's will be their performance over Christmas and their continuing ability to cope with the online threat. But even from this quick glimpse, I'm beginning to feel that the recovery at Ottakar's should lead to a short-term investment re-rating prospect.

Your say

So, after reading this feature, are you interested in Ottakar's as a potential investment?

a. Yes -- At 46.5p, they are worthy of further investigation
b. Yes -- But I'll consider them when they fall below 46.5p
c. No -- I do invest in retailers, but Ottakar's is not for me
d. No -- All specialist retailers are the graveyard of the small investor
e. Don't know / care

Click here to vote.

And please post your thoughts on this feature, Ottakar's and other retailers on the General Retail Sector discussion board.

Related Links

• The Motley Fool Industry Focus 2000
• Ask A Foolish Question discussion board
• Trouble Booked for Ottakar's
• WH Smith Interims down
• ScS Furnishes Interims
• Fad Boutique
• Matalanamania
• General Retail Sector discussion board
• Ottakar's website