Even the kitchen sink gets thrown at MFI's problems

'The shares have bounced but the next move could well be down'

Matthew Ingle took the top job in October and, in the time it takes most people to work out where the photocopier is, he has seen the retailer lurch from one crisis to another. Its market value has hit new lows, hedge funds have invaded the share register, gossip has swirled round trading floors of an emergency board meeting - strenuously denied by the company - and it can now claim the dubious title of most shorted stock: more people are selling MFI shares without owning them than any other listed company.

And if you think that's bad, the full-year results come out on Tuesday. The numbers are expected to be dire, with like-for-like sales down by as much as 20 per cent. There are even fears that Howden Joinery, the group's profitable trade business, has not performed as well as hoped.

But then, Mr Ingle knew what he was getting into. He ran Howden before, and the problems at MFI Retail certainly weren't a secret: his predecessor, John Hancock, was ousted following a fourth profits warning.

The first thing Mr Ingle did was launch a strategic review, the results of which will be unveiled on Tuesday. He has already ticked off some of his "to do" list, pulling out of joint ventures in the UK and Taiwan and closing the fledgling US business. A dispute with Revenue & Customs was settled, leading to the return of £21.8m, and French business Hygena Cuisines was sold for £92m.

He also arranged a £150m, 39-month banking facility, and the pension scheme was given secured-creditor status, meaning it has first call on Howden's assets, as the most profitable of MFI's operations, should the whole group go bust. The deficit is thought to be around £200m.

But with sales still heading south, there remains much to do. "We have been urging them since last summer to undertake reasonably radical change as rapidly as possible," says one major shareholder. "Although it was hurtful with the shares going down, we did feel there was still value there. But it's difficult to be restructuring the business against such a weak trading backdrop."

Mr Ingle is thought to be experimenting with the idea of an upmarket kitchen chain. And the sale of its 29-store Sofa Workshop, acquired in 2002, has been mooted. There is also the possibility of separating out Howden, allowing MFI Retail to seek more favourable terms from other suppliers.

But the main focus of the review is likely to be property. It is accepted that up to 20 stores have been earmarked for closure, but many would like to see deeper cuts. "We suspect that closing or selling up to half the near 200-store chain may be necessary," argues Nick Bubb, retail analyst at EVO Securities.

"It could be more radical," agrees the institutional investor, pointing out that the group now has cash available to help it get out of leases.

So how did MFI get into this mess? Most point to 2004, when IT problems rocked its supply chain, leaving orders unfulfilled and its reputation battered.

Nick Gladding, an analyst at retail consultancy Verdict, cites another mistake: "It has always been at the lower end of the market and tried to target more affluent customers, but it didn't do that very well." Put simply, the rich weren't interested and the traditional customers, unimpressed by the rising prices, went elsewhere.

So Mr Gladding has reservations about the latest idea: "Upmarket kitchen brands need a lot of investment and there's a lot of competition. I wonder if it might be a bit too much to manage at this stage."

But then, competition is a problem for MFI in every quarter of the market. As well as the threat posed by direct rivals such as Ikea, DIY retailers have got in on the act.

"The DIY chains want to fulfil the whole project, from building the extension to a new kitchen," argues Jonathan Pitkanen, a director at credit-rating agency Fitch. "They used to just pick part of that, so the competition has just got a lot tougher."

Amid all the gloom, MFI still boasts a market share of around 20 per cent, and the new banking facility and the sale of Hygena have shored up the balance sheet. It is widely accepted that a feared rights issue will not now be needed.

However, Richard Ratner, Seymour Pierce's bearish retail analyst, notes that the deals agreed with the banks and the pension fund mean they both have a call on the group's assets should the worst come to the worst. That MFI has done this indicates, he says, "that not only will the results be awful, but so will the report on current trading.

"The shares have bounced after the sale of Hygena Cuisines. The next move could well be back down again."

At the most basic level, Mr Ingle needs more customers spending more money. But he'll have to be patient. As one analyst notes: "Ultimately, it will all depend on knocking the UK retail business into shape; that's not going to be quick."