THE INVESTMENT COLUMN

Sleepy WH Smith needs shaking

WH Smith's new chief executive, Bill Cockburn, made all the right noises yesterday though it must be difficult to sound positive when you are announcing half-year profits of just pounds 17m on sales of pounds 1.3bn together with a profits warning for the second half.

The former head of the Post Office spoke enthusiastically about shaking up Smith's sleepy culture (shades of the Post Office), cutting costs and being more pro-active rather than just sitting back and waiting for others to take the initiative. His view is that, like Boots, WH Smith has a strong brand name on the high street but must make better use of it. He wants Smith to become the first name in childrens education and hobbies. He is also keen to increase the core chain's average customer spend, which is less than pounds 5 .

These are all good points but could prove harder to implement than he hopes. As Mr Cockburn no doubt found at the Post Office, changing a corporate culture is a long, hard slog, measured in years, not months. Cutting costs will be welcome but if these include large-scale redundancies, the next set of figures is likely to be scarred by large provisions.

WH Smith must also face its structural problems. Its key difficulty is that it is caught between specialist stores and the supermarkets, which are increasiongly moving into music and videos. Smith's problems are exacerbated by the fact that its own specialist chains, such as Waterstones and Virgin Our Price, are cannibalising the main stores more than management admits.

The group also needs fewer formats. Here the obvious headache is Do It All, the loss-making DIY joint venture with Boots. Smith's share of the loss was pounds 7.7m in the six months to December and could be as high as pounds 16m for the full year. Like-for-like sales were 3 per cent down in the half- year and with Texas Homecare being absorbed by Sainsbury's Homebase, the group faces an increasingly competitive market.

The company is refurbishing stores and closing others but more radical action is necessary. Closure or the sale of its 50 per cent share to Boots may be the answer, though this would be expensive and Boots is unlikely to be willing.

For shareholders, much will depend on the results of Mr Cockburn's strategic review, which will not be completed until the spring. In the meantime the company - and the shares - are likely to remain in limbo. After last year's profits warning, the shares have already enjoyed a bounce but remained unchanged by yesterday's news at 407p.

BZW has downgraded its full-year profits forecast from pounds 95m to pounds 85m which puts the shares on a forward rating of 20. High enough.

Textile sector

worth a spin

It is little wonder the textiles sector has been such a dull area of the stock market over the past year. The industry has been squeezed between soaring raw material prices on the one hand, and depressed sales caused by consumer diffidence and an exceptionally warm summer on the other. After running up through the early part of 1995, shares in the sector have now come all the way back down, leaving the FT-SE textiles & apparel index just 1 per cent higher than where it was a year ago.

But the index has already rebounded from a level not seen since last year, when raw material price worries were at their worst, and there are plenty of more tangible reasons to be bullish about textiles. The rise in raw material prices now seems to be past its worst, with near-term cotton contracts currently changing hands at around 85 cents a pound, compared with around $1.20 nine months to a year ago. Meanwhile, base rate cuts and tax reductions should provide a boost to high street spending in 1996, an expectation given some support by the generally optimistic tone of recent Christmas trading statements from retailers.

The imponderable remains the weather, but the chances are that 1996 will not repeat the record temperatures of last year, providing more incentive for consumers to go out and spend.

Investors looking to dip into textiles could do worse than look at Coats Viyella, which is well managed and has dumped a number of commodity businesses in the past year. Coats warned in December that the warm weather would hit last year's profits, which are expected by brokers Granville Davies to be around pounds 146m. But they should rise to pounds 166m in the current year, putting the shares down 2p at 194.5p on a prospective multiple of 13.

Dewhirst, a major supplier to Marks & Spencer, which has been revitalised by new management, is another stock worth a second look. The shares, up 1p at 184p, now stand on forward price/earnings of 15, based on Granville's forecast of pounds 22.5m current year profits. But, after outperforming the market by 16 per cent last year, they may be in for a period of consolidation.

Frost is petrol

war casualty

The appointment of Christopher Walsh, an oil industry veteran, to the board of Frost did little for the embattled petrol station group's shares yesterday. The price dropped another 4p to 155p, taking the fall over the past week to 14 per cent. Even with his 30 years of experience in the business, the new non-exective director will have his work cut out to reverse the problems facing Frost.

The body blow came last week, when Esso launched a big petrol price war by extending its price watch campaign to the whole country. At a stroke, the market's leading petrol retailer reduced its prices to the level of the supermarkets', which have carved out 22 per cent of the market from a standing start only a few years ago. Six days into the campaign, the signs are that the big store groups have yet to respond to Esso's move by reducing their own prices. But the threat remains and analysts have already slashed 1996 profits forecasts for Frost by around pounds 6m to pounds 15m.

Frost is exposed because of last year's pounds 83m deal to buy Burmah Castrol's petrol station business. The acquisition came close to doubling the group, bringing in 182 owned sites to add to the existing chain of 240 and 807 supply contracts to independent outlets.

In the light of the savage competitive environment, the Petrol Retailers' Association is forecasting that 70 per cent of the 10,000 independents will be forced out of business over the next two years. When it bought the Burmah business in June, Frost predicted it would lose 300 of its supply contracts in two years.

In fact, that has already happened and the company expects it could end up with as few as 300 in total.

The Esso move was in the wind at the time of the Burmah deal and James Frost, the chairman, has shown himself adept at weathering previous storms in the industry. But, despite a prospective price/earnings multiple of just 11, the shares are best avoided for now.