Woolies losing its way

SCRUTINEER

Woolworth

11p -0.75p

HBOS

593p -11.5p

A GRAPH of Woolworths' share price over the past 18 months resembles someone plunging off a cliff in one of the retailer's DVD games. There are brief juddering halts at fall-breaking ledges before the stock plunges precipitously again.

A further 6.4 per cent tumble in the shares yesterday shows investors remain unconvinced by the general merchandise group's strategy despite a return to the black for the company's UK high street stores business in the year just gone.

The scepticism is understandable. While a dividend cut was helpfully flagged in the media in the weeks leading up to Woolies' results, the extent of the parsimony – a 66 per cent reduction – still came as a shock.

In addition, some investors were disappointed in their hopes that the thoroughbred of the wholesale manufacturing division might be cut loose from the cart of retail via either a sale and cash return to shareholders or a demerger.

EUK, which sells DVDs and CDs to fellow-retailers like Tesco and WH Smith, is performing strongly, with sales up last year to £1.25bn from £920m.

That contrasts with Woolies' retail sales down to £1.72bn from £1.81bn so you can see why some investors are keen on a separation.

But group chief executive Trevor Bish-Jones ruled out such a move, at least for a couple of years, reckoning that both arms of the chain need to be sustainably profitable before such a strategy is even open to debate.

This raises as big a question as it answers, however, as the retail arm, even with its return to the black, has looked like a chain in need of a road map to shoppers' affections in recent years.

As has been written here before, if Woolies didn't exist already would there be any desire to invent it in the current converging retail landscape?

The group is squeezed between the supermarkets and specialist retailers. Both are eating its lunch.

Woolies' stock response is that its cheap n'cheerful business model gives it resilient defensive characteristics in difficult trading times such as exist now.

But the steady descent of the shares in just that sort of climate shows the group is no longer immune from a reining-in by consumers.

Woolworths has undershot the UK general retailers' index by 38 per cent in the past 12 months.

Along with the rest of the divi-cutting high street it can expect scant help from the general backcloth for the rest of 2008 and possibly 2009 as well.

In that overall context, you can see why Woolies' shares did not react yesterday with unalloyed relief to the retailer's return to the black in its still vaguely rudderless high street business.

MORTGAGE approvals in the UK in February this year were down comfortably more than a third on the same month a year ago.

First Direct, part of HSBC, has just suspended ALL new mortgage lending after being deluged by customers desperately seeking home loans in a suddenly disaffected lender market.

And data this week shows that voluntary pension contributions made by UK adults have nearly halved in the past 12 months.

Data from two disparate sectors, perhaps. But a common thread is a big double-squeeze involving both consumers' pockets and their aspirations.

In that climate, when you also take in higher utility and food bills, it is easy to see why the retailing outlook looks bleak, and big dividend cuts for shareholders in retail seem to be gathering momentum.

PROFIT margins are under pressure and many businesses are virtually writing off 2008 before any real recovery begins. This is pretty startling given that this mood of sometimes tacit realism has set in when we are barely one quarter into the year.

The only real difference now, from financial services to retail, is between the "optimists" who believe recovery will begin early in 2009, and the pessimists who think it will be sometime later next year.

HBOS, owner of Bank of Scotland and Halifax, is the latest to take this "forget 2008" line.

Mike Ellis, group finance director, told a banking conference yesterday that HBOS would face margin pressures this year, but that margins should become more stable, and possibly improve, in years to come.

The bad news is that the recovery is likely to be fuelled by extra funding costs being passed on to customers.