Smaller Companies: Why Goldsmiths could prove a gem

THE jewellery sector was last into the recession. In 1990, Gerald Ratner was still knocking out gold ear-rings by the ton when the rest of the high street was finding it hard to shift a prawn sandwich. Consequently, the stock market believes, jewellery will be last out of recession, too.

But there are tentative signs of life among the nation's jewellers. Official figures suggest that sales - in free fall for about 24 months - have hit some sort of base. Argos, the second-biggest player after Ratners, disclosed last month that jewellery was one of its strongest product areas.

All depends on Christmas, of course, but on the basis that the stock market is always looking nine months into the future, now is as good a time as any to examine the likely market for watches, rings and other gewgaws.

The troubles at Ratners, which still has 30 per cent of the market, look set to shift the equilibrium of the industry. Instead of a rapidly growing, heavily discounting force, Ratners has become a shrinking company, prepared to sacrifice sales to maintain margins. That is good for everybody except the customer.

One jewellery retailer that stands to benefit is Goldsmiths, a group of more than 100 stores. It has performed dismally since its flotation in February 1990, which flopped with 30 per cent of the shares left with the underwriters. From a float price of 150p, they have collapsed as low as 19p, and closed last week at 37p.

Although profitable at the operating level, it lost pounds 1.3m in the year to last March after a pounds 2m interest bill. The loss in the next six months to August was pounds 1.9m.

Goldsmiths has since seen patchy signs of recovery in demand. Like-for-like sales growth was 5.2 per cent in December, minus 1.5 per cent in January, 4.5 per cent in February, and is thought to have accelerated to 7.5 per cent in March.

Next month the group is expected to report a small pre-tax profit for the full year to 28 February, thanks to the pick-up in sales and better stock control.

Year-end borrowings of pounds 11m give gearing of more than 100 per cent. But Goldsmiths recently renegotiated its debt, paying a capped 8.5 per cent for two years, reducing the interest bill to about pounds 1.5m.

According to Jurek Piasecki, chairman, chief executive and a 15 per cent shareholder, the strongest pick-up has been in the upper end of the market, which, incidentally, tracks new car registrations closely. Sales of Rolex watches have surged in recent weeks, albeit from a low base.

Hoare Govett, the company's own broker, is forecasting pre- tax profits of pounds 800,000 in the year just begun and earnings per share of 2.6p, putting the company on a prospective price/earnings multiple of 14.2, modest for a recovery stock.

If March's sales growth can be maintained - a big if - that will prove an over-pessimistic forecast. Each percentage increase in sales, adds about pounds 200,000 to pre-tax profits.

There are dangers. A rights issue must be a possibility, though Mr Piasecki seems determined to avoid it if possible. Sterling's depreciation will soon add to the prices of imported watches. But, for the brave, the shares look an appealing punt.