Ratners teeters on rocky path: The volatile share price disguises real problems. Patrick Hosking reports

RATNERS is a dead duck. That is the conventional view. The jewellery group has too much debt and too many loss- making shops. The preference shareholders are screaming blue murder, and there is no value in the lower-ranking ordinary shares. The plunging sales and pounds 40m loss reported last week only confirmed what everyone suspected.

And yet, and yet . . . huge quantities of the equity are changing hands. Up to 30 million shares are bought and sold some days - more than 10 per cent of the entire share capital. The share price is on a helter-skelter, tripling in value in the space of a week in April, bouncing between 30p and 40p since then.

The speculators adore the stock. It even has some institutional admirers, including Scottish Amicable. Punters who bought at 8p last September have seen their stakes quadruple. Of course, there are many more small investors who paid more than 300p a share in 1987, mesmerised by the apparent Midas touch of Gerald Ratner, then chairman and chief executive, and who are nursing massive losses.

The smallest event can trigger a flurry of speculative buying: the appointment of Laurence Cooklin, the ex-Burton boss, as UK managing director; the results of the rival Goldsmiths Group; or rumours that the US rival Zales may emerge from Chapter 11 bankruptcy.

Investors have seen the recoveries of other troubled retailers such as Asda, Burton, Storehouse and Next. They also see the group's pounds 900m of sales and UK market share of 30 per cent. Surely that must be worth something? But Ratners remains overshadowed by a mountain of debt and onerous obligations on preference shares. Net debt worsened to pounds 288m last year, and the group owes pounds 36m of unpaid dividends on preference shares. These payments continue to clock up at the rate of pounds 30m a year.

Jim McAdam, executive chairman, is doing all the sensible things - closing unprofitable stores, freezing pay and cutting costs, reducing stock levels, lifting the gross margin by outlawing the old ways of discounting. But the result has been a sharp fall in sales.

Sales in the stores under the Ratners facia fell by an underlying 30 per cent last year - partly hit by Mr Ratner's infamous 'total crap' remark. Meanwhile, sales at H Samuel and Ernest Jones declined by 23 per cent and 11 per cent.

Only 160 out of 900 stores in the UK and 1,800 worldwide are now labelled Ratners. Eight Ratners shops are to be revamped in the next six weeks - with changed layouts, more fashion jewellery and fewer gifts.

Two alternative names will be tested. If these are successful, the Ratners name could be expunged from the high streets altogether.

Ratners is also hoping that economic recovery may lead to a pick-up in jewellery demand. Jewellery was one of the last sectors to turn down in recession and, according to government figures, sales have started to grow in the past four months. Much will depend on the Christmas quarter, when Ratners traditionally does most of its business. In the US, the Sterling and Kays shops have been steered back into the black.

The worst-case scenario for ordinary shareholders is that Ratners breaches loan covenants and is forced into an early reconstruction, offering to convert preference shareholders into ordinary shares on enhanced terms. The ordinary shares would be so diluted as to be almost worthless.

The best case would be a significant improvement in sales, which would constitute evidence that the company is capable of decent operating profits. That would lift confidence and the share price, enabling the group to raise new cash with a rights issue to pay off the preference shareholders.

Mr McAdam refuses to be drawn on any plans for a reconstruction: 'We have to get the trading business into the black. From that all else will flow.'

But there is only so far costs can be cut and only so many shops that can be closed. Eventually Ratners will need the merchandising and retailing skills that have taken a back seat since Mr Ratner was ousted last September.

According to Richard Hyman, managing director of the retail consultants Verdict Research: 'They are moving back towards being a traditional jewellers. In the current climate that is the right way. But some time in the future they'll start to miss Gerald's flair. The idea that one moment the bloke is brilliant and the next he's absolutely useless is absurd.'

(Photograph omitted)