October 8, 2008

Scrutineer: Here’s Food for Thought

By Scott Reid

N'thn Foods

59.25p -1.25p

N Brown

215p -1.5p

AMID the gloom, a rare morsel of good news to chew on. Northern Foods, the name behind Fox's biscuits and Goodfellas pizzas, did its best to cheer investors yesterday with a rise in first-half sales.

The group has had a rough ride of late, with its shares shedding almost two-fifths of their value since the start of the year amid concerns over soaring input costs and declining consumer confidence.

So, confirmation of a 3.9 per cent hike in underlying sales in the 26 weeks to 27 September will offer some comfort to Northern's hard-pressed shareholders.

Of particular note was sales growth at Fox's, boosted by a TV advertising campaign featuring cartoon character Vinnie - a cross between a panda and a dog.

The group claims that the ads - aired in April and May - led to an additional 1.6 million households snapping up its biscuits. At 6.7 per cent, revenue growth at the Fox's bakery division easily outstripped the group-wide gains.

Given the success of his TV debut, Vinnie is set to front a new campaign in the run up to Christmas. You have been warned.

Talking of the festive season (only 78 "shopping" days to go...), Northern also holds the title of biggest maker of Christmas puddings in Britain. Orders, we are told, are proving healthy.

Of course, the impetus for yesterday's trading update was to reassure investors that rising costs are being recovered.

The group has upped its selling prices by 5.6 per cent on average, helping to offset a 1.7 per cent drop in sales volumes.

Shares closed just 2 per cent lighter after rising earlier in the session. However, there were several less palatable revelations in the statement which investors should take note of.

Revenues in sandwiches, salads, and chilled pizza grew by just 1 per cent, slowed by the poor summer weather.

Northern is also closely aligned with the fortunes of one its biggest customers - Marks & Spencer.

Last week, the high street stalwart reported a near-6 per cent decline in like-for-like food sales over the last quarter as cash- strapped consumers desert its upmarket food halls for cheaper rivals.

Analysts at Citigroup, who rate Northern shares a "sell", were cool on the trading update, believing it would do little to reassure investors.

"With the current UK consumer environment in mind, we believe an appropriate level of scepticism should be applied," the analysts said.

Northern, which is on track to post full-year profits of about GBP 48 million, has shown that it is not afraid to take action to revitalise underperforming parts of its business and further restructuring cannot be ruled out.

A company famed for its sweet and savoury concoctions should stand to benefit from greater consumption of so-called "comfort food" in troubled times.

That said, it may take more than a reappearance by Vinnie to restore significant growth to the share price. Investors should stick with the stock in the meantime though.

WHEN Tesco chief executive Sir Terry Leahy presented interim figures last week, he made great play of his company's ability to adapt to the changing nature of his customer. The market was impressed, sending Britain's largest retailer soaring.

According to Leahy, there has been a fundamental shift in the nature of his customer. Rather than attempt to change the customer, Tesco has been forced to change its offering. All of the major retailers have and the battle is to make the best job of it. But aside from the immediate changes in customer demands, there are other, longer-term, trends. Yesterday Manchester-based N Brown demonstrated it was in tune with these, posting a 20 per cent rise in first-half profits.

Catering for larger, older, woman, the company is well suited to a country where there is an ageing population.

As the wider pool of discretionary cash decreases, at least its share of the pie is growing. And the company appears to have had success in its design, attracting a wider clientele.

Shares, although down almost a third on where they were a year ago, have outperformed the FTSE-all share by virtually half over the last three months.

With a market capitalisation of more than GBP 600m, the company is larger than much better known high street names such as HMV or WH Smith.

With demographic headwinds helping offset economic ones, the company seems better positioned than its peers to cope in the run up to Christmas.

(c) 2008 Scotsman, The. Provided by ProQuest LLC. All rights Reserved.