The Investment Column: MFI misses out on retail boom

It has been a tough year for MFI Furniture. In a period characterised by windfall payments, rising house prices and a revival of consumer confidence, the kitchen and bedrooms group has conspicuously failed to capitalise on the benign trading conditions. MFI shares have underperformed the market by 41 per cent this year and the fear among the group's critics is that if it cannot cash-in during sunny times like these, it will find it much harder next year as higher interest rates start to hit the high street.

To be fair to the management, there have been specific reasons behind MFI's underperformance. One is the closure of the German operations last year which cost pounds 3.5m. The other is France, where the poor economic climate meant the division lost almost pounds 3m in the half.

Given all that, the 8 per cent increase in half-year pre-tax profits to pounds 35.4m is reasonable and the 8 per cent rise in first-half sales is encouraging. In truth, MFI is in something of a transition phase and there is a new determination among the management to make more of the assets at their disposal.

The plan is to squeeze more value from the integration between manufacturing and retailing, improve the sales mix towards higher margin, higher ticket items such as kitchens and bedrooms, while shaving back the cost base. This will mean job cuts as the group closes the in-store warehouses at 186 branches and replaces them with 12 "super-warehouses".

In the stores, up to 15 per cent of product lines will be stripped out, with ranges such as upholstery and cheaper cabinet furniture under review. The question is whether MFI is shifting towards higher ticket items at the wrong stage in the cycle and whether the reduction in product lines will reduce sales.

The key to MFI's year will be the 10 weeks after Christmas, which accounts for a third of group's sales. Assuming full-year profits of pounds 85m-pounds 90m the shares - up 3.5p to 125p - trade on a forward rating of 11. A discount to the sector but not one to chase just now.