Hitt og þetta 20. september 2006

DJ THE SKEPTIC: Moth-Eaten Woolworths

By Howard Wheeldon

LONDON (Dow Jones)--Far from some encouraging signs of a turnaround, Woolworth's latest set of ghastly results points to more gradual decline.

Try as it might five years after the split from Kingfisher in 2001, Woolworth's management still seems capable of only of taking two steps back for every step it takes forward.

It's bad enough that like-for-like sales fell 8.3% in the six months to July despite management's confidence about the revamp of some of Woolworth's stores.

But the widening of losses to GBP64.9 million in the first half from GBP20.2 million at the interim stage in 2005 isn't going to provide investors with any more confidence.

That begs the question why the retailer is sufficiently confident about its prospects to boost the dividend by 4.9% to 0.43p?

Perhaps it's because management fears a bid from the likes of Icelandic retailer Baugur which already has an indirect 10% holding in the big retailer, or another suitor. Either way, shareholders' shouldn't get their hopes up.

On a flagging balance sheet with shareholders funds now down to just GBP250.8 million, net debt of GBP115 million and a pension fund deficit of GBP71 million, raising the dividend is hardly a wise business decision.

If it really is an attempt to put a brave face on performance, investors should ask themselves why a Baugur-led consortium, ready to sort out other recent acquisitions like House of Fraser, would want to buy a downmarket company like Woolworth's?

The answer could be that, for all its woes, Woolworths is the U.K.'s eighth largest retailer. The company retains customer appeal for items like cheap children's clothing, sweets and confectionery.

But if Baugur is interested in acquiring Woolworths, it can probably afford to wait. After all, not even the prospect of a bid has spurred the shares on much over the past year. Indeed, at 33p, Woolworth's shares are standing at around the same level they were when it was hived off in 2001.

And the reality is that trading conditions are likely to get worse for all the U.K.'s nonfood retailers in the months ahead. Woolworth's expensive shop-revamps and new product ideas, aimed at increasing footfall through its network of stores that badly needs pruning, won't offer much protection.

Woolworth's is no Marks & Spencer. It's at the opposite end of the market where the sort of miracle recovery that Marks & Spencer eventually achieved is harder to pull off.

Down there, every penny counts for the shopper. So widening the product range and cutting prices has its limits. And while the second half is traditionally the stronger period for the retailer, the months ahead may not be as good as Woolworth's management thinks.

(Howard Wheeldon was a senior equities analyst for 20 years, and has been a columnist at Dow Jones for the past four years. He can be reached at +44 207-842-9251 or by e-mail: howard.wheeldon@dowjones.com)

(END) Dow Jones Newswires

September 20, 2006 05:42 ET (09:42 GMT)

Copyright (c) 2006 Dow Jones & Company, Inc.

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