Foolish Special
[ Friday, December 17, 1999]
A Foolish Year -- The Motley Fool looks back at 1999
By Maynard Paton (TMFMayn)
1999's Vanquished
To put it very mildly, this year's Retail sector has not been a pleasant investment experience. The ultra-competitive nature of retailing, memorably described as a 'bloodbath' last year by former Marks & Spencer (LSE: MKS) Chairman Sir Richard Greenbury, continued unabated into 1999.
And just as investors thought events couldn't get any worse, they had to cope with a new and emerging retailing concept: the threat of discounting. Aided by the likes of Matalan (LSE: MTN) and TJ Hughes (LSE: HGH), the well-documented ASDA/Wal-Mart effect is expected to generate the very real and significant risk of yet more bloodshed on the High Street.
Given the retail malaise, it has been no surprise to see a string of big name retailers all witnessing, or area expected to witness, their profits crumble. The list of the 1999 UK stock market under performers is a veritable Who's Who of famous retailers: Marks & Spencer (LSE: MKS), Arcadia (LSE: AG.), Debenhams (LSE: DEB), Boots (LSE: BOOT), Somerfield (LSE: SOF) and Safeway (LSE: SFW). The list goes on. All have seen their valuations marked down severely during 1999.
For this retail sub-feature, any one of the aforementioned stock market laggards could have warranted a further peek. However, I decided to look at Storehouse (LSE: SHS), the owner of the BHS and Mothercare chains. Storehouse, minus a chief executive for most of the year, looked lost and bewildered in the frenzied High Street conflict. Needless to say, Storehouse took more of battering than most in the mid-market clothiers bloodshed.
The year didn't start auspiciously for Storehouse. A New Year announcement stated that the all important like-for-like sales figure in the last quarter of 1998 had fallen: 4.5% down for BHS, 6.1% down for Mothercare. It set a downbeat tone that lasted throughout the year.
A profit warning accompanying the full year preliminary results announcement in May furthered investor woes. "A sharp and sudden downturn in the UK clothing market" and "particular problems in the clothing division of Mothercare" led to the first drop in year-on-year profits for seven years. Full year earnings fell 23% to £70m.
The comment on UK trading during the first half of the year was "extremely challenging". Current trading at the time of the full year announcement was again "difficult", a slight understatement maybe, as it was reported alongside a like-for-like sales figure decline of 6.8%.
There were some glimmers of hope, though. Alongside various staff, systems and store restructuring, the Storehouse board proudly announced they had also "determined the future for Mothercare" -- it revolved around an emphasis on the larger Mothercare World "destination" store.
Further unpleasant news was never too far away though. Just one week after the poor results, Storehouse chief executive Keith Edelmann resigned. Without a leader, Storehouse was now viewed by the stock market as either a potential bid, breakup or merger target. A constant stock market theme throughout the summer was to identify a potential Storehouse suitor. Against a background of shrinking sales, all the market speculation gave upward spurts to an ever downwards Storehouse share price.
Littlewoods, the Barclay Bothers, Philip Green, Peacocks (LSE: PEA) and most recently Knutsford (LSE: KTD) were all placed in the "corporate activity frame" at one point or another. Sadly for Storehouse shareholders, none of the rumours came to fruition.
Interim results announced in November heralded the beginning of the end for Storehouse in its current format. It was at this point that Storehouse had "concluded that the current holding structure no longer adds value". A split of the business, into separate BHS and Mothercare entities is now planned for 2001.
Financially, the interims were disastrous. A like for like sales decline of 9% produced an interim loss of £15m, compared to the £38m interim profit of 1998. Those "value" investors who bought Storehouse looking forward to the relatively high prospective dividend yield were disappointed too -- the interim dividend was passed.
In an effort to console shareholders, Storehouse told of the "launch of major recovery plans" for both BHS and Mothercare. BHS, in a "radical shift", was to move to the value end of retailing and re-introduce food. Mothercare's recovery rested upon extra Mothercare World stores and a Mothercare.com site. A subsequent announcement revealing deep price cuts in the run up to Christmas did little to enthuse already extremely weary investors. The shares, opening the year at 140p, have slid to a low as 44p during December.
The future for Storehouse? At some point in the share price decline there may be such deep "value" in Storehouse's valuation as to entice the long hoped-for bidder out of the woodwork. As a standalone retailer that dominates its market, Mothercare could look an attractive retailer if the current operational problems are ironed out. BHS, not one the greatest of retailing brands, has on the other hand plenty of ever-aggressive competition to fend off.
Thomson Travel floated to great private investor excitement in the spring of 1998. Half a million private investors were lured to the offer, buoyed mainly by the familiarity of Thomson's high street business Lunn Poly and offers of "holiday perks" in the form of membership to the Thomson Founders' Club.
Nearly two years on, that investor enthusiasm has completely vanished. What so many originally thought would be the investment equivalent of a month in the Maldives turned out to be, in 1999, a wet weekend in Wales.
It all seemed to going so well for Thomson at first. In the Spring, full year results for 1998 were announced and were in line with the flotation expectations. However, it wasn't too long afterwards that Thomson shareholders got the distinct feeling of travel sickness.
A coincidence perhaps, but the morning of Thomson's AGM saw second place UK tour operator Airtours (LSE: AIR) launch a hostile bid for third place market player, First Choice Holidays (LSE: FCD). If the bid went through, Airtours would have a third of the UK market and would become the undisputed UK industry leader, leapfrogging Thomson.
Paul Brett, Thomson chief executive, was immediately on the offensive at the AGM. "We believe the current structure of the industry is working well. We have been the market leader in the UK for the past 25 years and have no intention of surrendering this position." Brett solemnly declared.
Although there was vague market talk of a "spoiler" bid from Thomson, highly unlikely to go through on competition grounds; most investors now had nightmare visions of an impending holiday price-cutting war. From a peak of 185p in March, the six weeks up to the AGM proclamation had seen Thomson shares tumble to 127p.
The summer brought no further sunshine to Thomson shareholders. Immediately after government watchdogs highlighted concerns over links between UK tour operators and their High Street travel agent outlets, Thomson issued a miserable trading update.
A slow take up of early summer holidays, blamed in part on the Kosovo conflict and additional costs of discounting the remaining surplus holidays, caused Thomson to warn on near term profits. Trying to coax holiday makers to travel in late summer was also proving problematic. But there was at least one person going on holiday. On issuing this dismal news, Paul Brett resigned.
Moving into Autumn, the Thomson bad news flow was becoming a flood. Interims out in September led with further dire trading reports from the UK travel industry. Demand for September and October departures had now "weakened significantly with substantial price reductions being required."
It seemed nothing was going to go Thomson's way this year. Not even the much anticipated saviour of the travel industry, the Millennium holiday, came to the rescue. Demand for holidays over the special holiday period was said to have "fallen significantly". First half profits of £6m in 1998 melted away into losses of £9m during 1999.
With the severe discounting on Millennium holidays continuing, brighter news came very late in the year. Confirmation in November of an upturn in summer 2000 holiday bookings brought Thomson's woeful share price back up from the depths of 70p to the 100p level seen today.
Thomson shareholders could be forgiven if they decided to pack up their bags with this investment. Though Thomson have acquired growth opportunities on their travels abroad during the year, the main profit contributor is still the aggressive UK market. With all that in mind, the possibility of short term sunshine for Thomson shareholders still appears distant.
Prior to this year, the story of Jarvis (LSE: JRVS) was that of stock market folklore -- a true penny share coming good. Transforming itself into a facilities management company, Jarvis shares peaked at nearly 800p during the summer of 1998. However, as with most shooting stars, they do have the nasty habit of falling back to earth with a bump should bad news materialise. Jarvis was no exception to this old stock market rule in 1999 and is a salutary lesson in the dangers of a company relying on one big customer that suddenly starts turning the screw.
Jarvis' main operation lies in the managing and maintaining parts of the UK rail network infrastructure, activities outsourced via Railtrack (LSE: RTK). But since June 1998, there had been trouble in the ranks at Jarvis. Sporadic strike action protesting against changes to employment terms gave investors cause for concern. Jarvis shareholders, with thoughts of disgruntled employees and a highly rated 650p share price, entered 1999 with trepidation.
Against a background of an ever-dwindling share price, it appears the market wasn't too surprised when Jarvis updated on trading in the Spring. Although the industrial dispute had been resolved, Jarvis inevitably had to bear extra costs to keep contractual obligations in place with Railtrack. And that wasn't the only problem Jarvis revealed. There was also confirmation of the decision by Railtrack to defer certain contract renewals -- Railtrack instead deciding to re-consider the contractual criteria. All this meant near-term profits for Jarvis wouldn't meet expectations, but nevertheless were expected to be "well ahead" of 1998.
Full year results were announced in June -- it wasn't pleasant reading for investors.
Alongside the industrial action and the Railtrack contract deferment decision came another blow. "Negotiations with Railtrack in respect of certain contractual entitlements ... have unexpectedly faltered in the last few days." reported Jarvis. The surprise announcement prompted the unusual step of Railtrack issuing a statement to comment on the Jarvis results. Railtrack confirmed the unresolved negotiations, but also stressed the "high performance" of Jarvis in the maintenance contractor league table.
The late plaudits from Railtrack couldn't help the Jarvis full year profit and loss account though. All the aforementioned operating difficulties had seen £40m in sales evaporate and an extra £21m of costs to bear. Jarvis stated that the additional charges had "blighted what would have otherwise represented an excellent financial performance". In the end, profits were £42m versus £37m. That wasn't the "well ahead" the market was expecting after the Spring update. Add in the last minute negotiation breakdown, and it was unsurprising to see investors getting the jitters. Jarvis shares plunged 155p (31%) to 339p on the day.
Not even good news during the late summer could muster any enthusiasm for Jarvis now. An agreement with Railtrack over the outstanding contractual entitlements, and some good news on the contract renewals front, couldn't spark any upwards momentum into an ever-deteriorating share price.
A change of reporting tack was noticed in the interim release during December with the initial trading comment: "Our involvement in markets which show substantial growth, Private Finance Initiatives, Road Safety and Rail Infrastructure...". Jarvis had begun to emphasise its other activities, and tried to appear less reliant as a whole on dealings with Railtrack. Investors no doubt will be hoping that the move towards non-railway work will be quick. Interim profits dropped nearly 50%, Jarvis citing a "shortfall in track renewal activity" to blame. The shares now languish at around 210p.
Jarvis hasn't entirely moved out of Railtrack's shadow yet, with a significant amount of revenue still generated via railway maintenance. And there are further doubts over Jarvis sustaining historic margins on future railway contracts also. Until the spectre of various Railtrack concerns has been removed, Jarvis shares won't be completely back on their growth track.
The Year In Review
Introduction
1. TMFEagle looks at the gold medallists of 1999.
2. TMFMayn visits the kennel: who were the dogs of the past year?
3. TMFEssex ruminates on a sector by sector basis.
4. TMFNigel thumbs through the year on the World Wide Web.
5. TMFTiger reviews the rise of intellectual property companies.
