General stores once again lagged the All-Share index as the sector’s problems were put centre stage by JJB’s plans for a second CVA.
But food groups were up as Morrisons created excitement with the £70m acquisition of online specialist Kiddicare. The high multiple paid - more than 20 times EBITDA - was a sign of the strategic importance the grocer placed on the acquisition.
Analysts welcomed the deal. Bank of America Merrill Lynch, which rates Morrisons a buy, said: “This should reassure the market that Morrison is not stuck in a strategic straitjacket and is willing to embrace profitable online channels.”
However, Mothercare, already out of favour before the Kiddicare deal because of pressures in its domestic market, suffered. Seymour Pierce, which rates Mothercare a hold, said: “The food retailers are increasingly moving into Mothercare’s core categories”.
Last week Investec brought back its Mothercare profit expectations. It said: “The operational gearing in the UK business indicates further downside risk to UK EBIT. This is likely to continue to undermine the investment case, despite an attractive international growth profile.”
Chocolatier Thorntons is likely to remodel its own-store portfolio and effectively issued a profit warning after first-half earnings slid by 8.5%. Broker FinnCap, which rates Thorntons a sell, said: “This is the latest in a series of disappointments stretching back over a decade. The business faces structural challenges that have withstood several sensible sounding strategic shifts.”
Computer entertainment group Game updated on strategy on Wednesday, when it unveiled plans including “achieving seamless multichannel integration” and a “step-change in online revenues”.
Broker Singer rates Game fair value and said: “Despite investment in the current year leading to some estimate revisions, the fact that management expect the initiatives to be earnings enhancing over the three-year period should be well received.”
Arden has an add recommendation on Game and said: “Game has had a tough time in recent years, but the business model seems to have more legs than other specialist entertainment retailers like HMV.”
Altium, which recently upgraded HMV from sell to hold, issued a note arguing that value could be created through restructuring, including a one-for-one rights issue, disposal of Waterstone’s, reduced store numbers and improved multichannel operations.
The broker said: “While we remain pessimistic about HMV’s prospects, it is possible to paint a more optimistic scenario whereby equity value could be created, unlike in other ‘priced for failure’ retail stocks.”
Today the latest phase of the JJB saga will be played out as shareholders meet to approve fundraising plans.