Bluechip: Stock up on Storehouse

Storehouse has been in the doldrums for longer than many care to remember. A flurry of excitement recently, with the shares outperforming the FT-SE in the last month, did little to make up for years of underperformance.

So it would be brave to believe that the shares, now at 221.5p, are worth 275p. Yet that is what analyst Julie Ramshaw at stockbroker Morgan Stanley says. Her argument is worth considering. Storehouse has been criticised for two reasons: poor like-for-like sales growth, and questionable accounting techniques. However, the recent AGM asserted that like-for-like sales growth was positive, with Mothercare and BhS improving. Ms Ramshaw thinks like-for-like sales growth is now three per cent ahead of last year for both divisions.

On the more intriguing issue of whether Storehouse has flattered its accounts, essentially by reducing its "other costs", she thinks not. The group flatly denies any suggestion that it has received uniform business rate rebates, up-front franchisee payments or property disposal profits that could have massaged the figures. This cloud has been hanging over the shares for two years, and it would be unusual for a public company to risk these denials if there were a chance it could be found out.

Take design. Storehouse used to outsource design, but the arrival of Keith Edelman as chief executive saw design brought in-house to enhance design content and productivity and keep a tighter rein on a key business area. As a result, this item moved from other costs to labour costs. So Storehouse still pays for its design - it just shows up under a different item.

Meanwhile, the business is forging ahead with its BhS Millennium refit. About 80 stores will have had the treatment by October this year. Management says the refurbished stores show an improvement of 3.5 to 5 per cent in sales.

Overall, the strategy so far has been to cut costs and improve gross margins. The task now is to build sales.

Morgan Stanley forecasts that pre-tax profits can hit pounds 131.2m in 1998, up from pounds 118.3m in the year just ended. In 1999, profits could hit pounds 146m. On that basis, earnings per share come in at 21.2p and 23.5p over the next two years, leaving the shares on a measly price/earnings ratio of 10 times and 9.1 times for the respective years. The current retailing climate is bound to generate some growth which, compared to the heady multiples of other retailers, certainly makes Storehouse cheap. With limited downside, the shares are a buy.