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Keeping it simple works for Asda

The Investment Column

Edited Magnus Grimond
Thursday 26 June 1997 23:02 BST
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Judging by yesterday's results from Asda, Archie Norman, its part- time chairman, has plenty of time to take on the lost causes of the Tory party. Things at Asda are rolling along just fine. The store group's sprightly sales growth last year adds credence to its claims that sticking to "simple shopkeeping" and low prices rather than branching out into costly unknowns like banking is a sound strategy.

Asda's like-for-like sales growth at 9.2 per cent certainly outshines Sainsbury's 3.2 per cent. With practically no inflation over the last six months, most of that has been pure volume.

Of course Asda is still catching up with more mature peers, but its former "disasda" tag is now a distant memory. With players like Kwik Save weakening, the group continues to pinch market share, taking another 1.1 percentage points to reach 11 per cent last year.

The group is also benefiting from what it calls "truly different" stores. For one thing, Asda's shops are bigger, at around 45,000-55,000 square feet compared to around 27,000 for Tesco and Sainsbury, giving it more space to devote to higher growth non-groceries.

The "George" clothing brand has been a particular success, with toddler and baby wear sales up 32 per cent compared to just 2 per cent for the market. Volume sales per square foot are as good as Next or Marks & Spencer, but with half the labour and distribution costs, Asda can afford to sell clothes at 20 per cent below high street prices. The group reckons it can double its clothing sales - currently 5 per cent of turnover - to pounds 800m in a few years and increase its share of the children's clothes market from 7 to 10 per cent by the year end.

There are concerns. One is that without a major move into branded services like banking and even a loyalty card (though that is likely to come) the group may suffer in the longer term. The issue is pertinent now that Archie Norman, who has been so effective in promoting the Asda name through headline-grabbing campaigns on the net book agreement and aspirin prices, will be spending more time in Parliament and less in Asda's boardroom.

The jury is still out on the new management. Equally, Asda may not have the hypermarket sector to itself if Tesco begins expanding in that area. Meanwhile it is getting harder for the group to expand, given the lack of greenfield sites in the south, where it is still not well represented and land prices are high. Analysts' profit forecasts range from pounds 375m at SGST to pounds 397m at BZW. The shares, up 3.75p to 125.75p, are on a forward p/e ratio of 14, still lower than Sainsbury on 15 times, but about right.

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