Textile firm spins a good yarn

Investors' appetites have already been whetted by fast-expanding specialist retailers like Carpetright and DFS Furniture which now command racy price earnings ratios in the high 20s to 30s. A less familiar story, but one nevertheless of remarkable expansion, is Rosebys, which specialises in household textiles such as bed and table linens. Helped by a string of acquisitions, this aggressively managed business has quadrupled in size since it was spun off from finance house Cattles in 1992.

And the excitement looks far from over. The group has just bought Rexmore, a textile wholesaler and converter (a company that commissions printing and dying of raw cloth), which is a coming home for Rosebys. The group was formed in the late 1980s when Rexmore merged its retail operation with Rosebys' at Cattles to form a chain of 90 stores. Rosebys' chief executive, Michael Rosenblatt, is also chairman of Rexmore.

Both companies have exploited the recession to make keenly priced acquisitions. Rexmore, which supplies household textiles to refurbishers and smaller manufacturers, recently expanded sales by 50 per cent by buying rival S Ross for pounds 3.5m and has sold non-core activities such as its timber business. Rosebys opened new stores and, in 1995, expanded dramatically by buying 90 Brentford Nylons shops from Lonrho for pounds 4m. A further nine stores in the South were then bought from receivers for pounds 475,000. In December 1995, the 13-strong Knightingales chain was acquired for pounds 3.14m.

Rosebys expects to end the year with 345 outlets. It aims to expand to around 350 shops and build Knightingales into a discounter operating from large outlets (2000-3000 sq ft versus 1200-1400 sq ft at Rosebys) with 100 shops against the current 40. Mr Rosenblatt describes Rosebys as a value-for-money retailer trying to match department store quality. Over half its products are imported from low-cost suppliers like Turkey and Pakistan plus Europe and North America.

The group is constantly looking at options for growth. It recently completed a deal with Belfast retailer Hampdens to franchise some 25 Rosebys stores in Northern Ireland and Eire. In Britain it has been opening shops within out-of-town retailers like Courts Furnishings as a possible prelude to developing its own out-of-town format.

These activities have been rewarded with growth in sales since 1992 from pounds 45m to pounds 69.2m and pre-tax profits from pounds 2.3m to pounds 4m with earnings per share up nearly 50 per cent from 8.6p to 12.7p on a share price of 278.5p. Analysts forecast that Rosebys will make pounds 6m in 1996. Rexmore was expected to make approaching pounds 3m for the year to 31 March 1997 after pounds 1.9m, excluding exceptional items, for 1995-96. The two companies together will be capitalised at some pounds 90m and are forecast to make pounds 7m in 1996 (including three months from Rexmore) rising to pounds 10m with earnings per share around 20p for 1997.

But there are good reasons for expecting the enlarged Rosebys to do better than pounds 10m in 1997. First is the new buoyancy in consumer spending. After a string of flat years, sales were up 7 per cent in the first half of 1996.

Second is operational efficiencies. Sales in 1997 should reach at least pounds l70m, so profits of pounds 10m implies the same 6 per cent margin expected in 1996. But the group is rationalising manufacturing and distribution facilities, has vastly increased purchasing power and will be progressively sourcing products, at higher gross margins, from Rexmore's wholesaling and converting operations.

If consumer spending keeps climbing, Rosebys could easily produce a pleasant surprise. Borrowings are likely to end the year at less than 10 per cent of shareholders' funds, adding fuel to Mr Rosenblatt's hints that the acquisition spree is not over yet. The shares look an exciting buy as investors wake up to the emergence of a new force in Britain's high streets.