Fool's Eye View

[ November 30, 2000 ]

Great Universal Stores

By David Kuo (TMFDragon)

Carburton Street, London -- Retailers have had a tough time of it lately and although many will enjoy a reasonably buoyant Christmas, tough times are still ahead of them. Warnings of a slowdown in sales, or more precisely a slowdown in earnings, over in the US, will no doubt feed through into the UK in due course.

This morning, Great Universal Stores (LSE: GUS), or just plain old GUS to its friends, reported half time numbers. Sales were up, pre-tax profit down and dividend unchanged. This trend towards an improvement in sales but a downturn in profits is becoming a very familiar tune whenever high street retailers step forward to announce results. Clearly what is happening in the retail sector is the commoditisation of products and services to such an extent that price become the only weapon left in the retailer's armoury to attract customers. GUS, as far as I can see, has no discernible brand presence on the high street apart from its Burberry collection.

What do the numbers tell us?

My favourite ratio when analysing company results is the return on capital employed. This is also sometimes known as the primary ratio. The primary ratio is quick and easy measure of management efficiency and an indication of the ability of management to make use of its available resources.

The primary ratio for GUS has fallen by approximately one percentage point from 3.9% last year to 2.9% this time. By itself, the primary ratio is not particularly meaningful. But the primary ratio is also a product of two other ratios, namely the operating margin and the asset turnover. For GUS, operating margin declined from 5.5% to 4.2% and asset turnover was almost unchanged at 0.7.

So What?

What this implies is GUS has been forced to boost turnover at the expense of margins. The strategy behind this primitive but effective sales tactic is to boost sales sufficiently to encourage a greater improvement in the asset turnover. However, GUS has been unable to achieve this bit of retailing prestidigitation, which accounts for its worsening primary ratio.

In today's statement, the company said the retail market remained competitive. It also said the recent strength of the US dollar against sterling could mean the end of deflationary pressures. These appear to be the words of a retailer that has now run out of ideas to boost profits and hopes that a healthy bout of inflation would be able to help it out.

GUS announced today its intention to float off 25% of its Burberry division within eighteen months. Valuations of this branded clothing company vary from £1b to £2b, which would net GUS a handsome profit. Having seen the performance of GUS, it would be a blessing for those involved at Burberry to be rid of a management so short of creative ideas. Rather than a partial spin off from its parent, Burberry should ask if it could leave home completely and set up house as far away from GUS as possible.

Where Next?

I've had my say; why not have yours over on the GUS discussion board?