Stores in the spotlight as sale talk heightens

Anglo-French electricals group Kesa is thought to be considering disposing of its troubled Comet chain in the UK. Broker Oriel said investors had three choices: buy Kesa in expectation that profitability will improve once Comet is offloaded; buy Dixons in anticipation that it would benefit from a softer competitive environment; or buy Carphone Warehouse, which aims to take on the two electrical incumbents in partnership with Best Buy.

Oriel advised the third option, even though there is some uncertainty about strategy ahead of an update next month. The broker rates Carphone a buy because its shares have been more stable than Kesa’s and Dixons’, which both have risen since the end of March and have potential good news priced in.

Reduce HMV, Arden advised. It is thought that Russian tycoon Alexander Mamut is willing to pay £43m for HMV’s Waterstone’s books chain but the broker feared that would not solve the group’s problems.

Arden said: “Ex-Waterstone’s, we think the group will probably fall into a small loss in 2011/12, given how trading is collapsing, and group net debt will still have been nearly £100m at end-April, so selling Waterstone’s is not the final answer.

“It looks as if HMV is also considering a CVA to radically shrink the UK chain, and at the end of the process we suspect that HMV will still need to raise new equity.”

Signet was reported to be considering selling its UK operations, which include H Samuel and Ernest Jones. MF Global has Signet on its conviction buy list. The retailer is scheduled to update on trading next week.

Mothercare sent shockwaves around the market by announcing plans to dispose of 110 UK stores. Full-year underlying group profit was down 23.4% to £28.5m. Excluding exceptional items and currency adjustments, pre-tax profit collapsed from £32.5m to £8.8m. “Given increasing supermarket competition, we think that Mothercare needs to look more closely at the pricing of its range, the positioning of its range and the design of its stores,” said Arden’s Nick Bubb.

French Connection updated on trading for the first three months of its financial year. Group revenue was up 3.6%, driven by wholesale, but like-for-likes in the UK and Europe were down 1.8%.

Buy JD Sports, FinnCap advised. The broker said JD’s shares were“substantially undervalued” versus other retailers’ and thinks that although JD is in for a tough year, “management will respond to the challenge”.

Next week the big event will be bellwether Marks & Spencer’s full-year results.