Bottom Line: MFI seeking a recovery formula

IT SEEMS that MFI is running out of excuses for its failure to boost turnover. Yesterday it attributed a poor January sales season partly to the ending of the Government's stamp duty holiday. But that ended in mid-August, which should have given buyers enough time to move houses and plan renovations before the sales started.

In truth, MFI has yet to prove that it can expand sales as efficiently as it has cut costs. The rise in costs in the five years since 1989 has been just 2 per cent, but sales over the same period have remained virtually flat.

Results for the year to 24 April once again reflected economising - pounds 700,000 shaved from the wages bill, letting of surplus space brought in an extra pounds 2.5m - rather than expanding. But operating margins still dropped from 11 to 6.5 per cent, profits before tax slumped from a pro forma pounds 66.1m to pounds 40.2m and earnings from 7.4p to 4.5p.

The tentative nature of the recovery means that Derek Hunt, chairman, and his colleagues will have to work hard to reverse the decline, and there is no guarantee that they have yet found the formula.

The 'new concept' - more flat packs and better displays of beds and sofas - has now been fully introduced in 56 of its 175 stores and partially in others, and sales increases in these are running 6 per cent ahead of those in older stores. As sales overall still fell 6.7 per cent to pounds 603.9m, the refurbishment is clearly long overdue.

MFI is also bidding to stem the decline in its share of the kitchen market - under threat at the start of the year - with a new approach to advertising. It has realised that few customers are persuaded by adverts which claim bigger and bigger discounts on scarcely credible list prices, so it is now telling them exactly what they will get for their money.

It is confident that has won back the customers it lost - although the figures will not be available for some weeks - but at the expense of some of its margin.

The cost-cutting means that cash has continued to flow into the business, cutting gearing from 80 to 52 per cent during the year, with a further fall expected in the current year.

Mr Hunt is too cautious to attribute the 3 per cent rise in sales in the first 11 weeks of the current year to such initiatives, and he warns that trading remains volatile. But investors are convinced that the recovery is stronger than either industry or economists are reporting, and MFI's shares rose 1.5p to 128.5p.

Even on the more optimistic forecasts of pounds 60m, or 6.9p of earnings, that puts the shares on a demanding 18.6 times earnings, a premium of 25 per cent to the rest of the retailing sector.

The 3.75p dividend, via a 2.5p final, gives a 3.64 per cent yield - hardly generous, particularly given Mr Hunt's warning that rebuilding cover will be as important as offering further increases. Even if the sales increases are sustained, there is little to go for in the shares.