View from City Road: Isosceles' hard work begins

ISOSCELES is no doubt delighted that it has managed to get its refinancing agreed, but that is likely to be the easy part. Getting the business into shape for flotation, now deferred until 1995, will be no mean feat.

To its credit, the group, under its chairman, Ernest Sharp, did manage to improve profits, excluding the stores that it sold to Kwik Save, from pounds 166.1m to pounds 169.3m on virtually static like-for-like sales, while margins rose slightly from 5.95 to 6.07 per cent. But that is still more than one percentage point below its larger rivals, and it admits in its financing document that: 'Food price inflation has declined rapidly and is now running at a rate below that of Gateway's cost inflation, putting pressure on margins, while the level of price competition remains high.'

Its only hope of fighting back against that trend is to accelerate the programme of converting the old Gateway stores to the new Somerfield format, which, it says, has achieved double-digit turnover increases every year since opening, to Food Giant discount stores and the three smaller formats.

The trouble is that the financial constraints of paying its bankers - who took pounds 159.7m in interest last year - mean it can only afford to spend pounds 100m a year. That means it will only manage to convert 39 stores to the new formats this year, leaving it with 574 Gateways but only 65 Somerfields and 24 Food Giants by next April. With Tesco, Sainsbury and the rest spending up to pounds 1bn each a year rolling out new stores, it will be left further and further behind.

It also needs to repay its pounds 1bn senior debt by 31 July 1995 - pounds 160m of it due within the next two years. Management is still hoping to sell Herman's Sporting Goods, the US chain, but the pounds 144.8m write-down - leaving its net asset value at about pounds 50m - does not suggest a particularly attractive price. That means a sale of Wellworth - the Irish supermarket chain that contributed pounds 18.1m to operating profit and that Isosceles had hoped to be able to float - is all the more imperative. A sale should be completed in the late autumn, with luck for more than the pounds 114.7m value in the balance sheet.

While a successful sale would ease the financial pressures, the bigger question - whether Gateway can survive the competitive pressure intact - remains.

(Photograph omitted)