If the lure of taking the top job at DSG International was of becoming a FTSE 100 chief executive, John Browett might wish to reconsider.

Since the Tesco director agreed to join the Currys.digital and PC World owner in June, its shares have fallen 24 per cent, meaning the company is likely to be ejected from Britain’s benchmark index at its next quarterly review in December. Should it occur, the demotion of DSG to the FTSE 250 would be announced on December 5, the very day Mr Browett joins.

But the company’s first-half results lie in between and, as yesterday’s preclose trading update indicated, there is still plenty of scope for things to get worse before then.

The problem is not in its core UK electricals divsion, where trading has actually strengthened over the past six months: sales here are up 6 per cent on a like-for-like basis.

DSG’s difficulties lie in Italy, where business at its problematic UniEuro division has deteriorated further, and PC World, where sales of Microsoft’s Vista operating system are running below forecasts and the need to clear unsold laptops has knocked 2 percentage points off gross margins. The effect has been to wipe £20 million off this year’s forecast pretax profits.

As is customary at this time of year, DSG trotted out the roster of newly released consumer gadgets – from digital SLR cameras to computer games consoles – that give it grounds for cautious optimism ahead of the critical Christmas trading period. But given its overordering of laptops, the company’s declaration that it has sufficient stock for the festive season only raises the fear that it may be forced into heavy discounting should consumer spending prove weaker than expected.

There are other concerns. The forthcoming regulatory review of warranty sales is likely to weigh on the shares, as is increased competition in Sweden for its Elkjop division, where like-for-like sales are currently running 4 per cent ahead.

But the biggest concern remains DSG’s profits - or rather, their failure to rise meaningfully over the past five years. Yesterday’s cut in pretax forecasts to just £300 million – lower than that of the previous three years – should remind that this is not a growth stock, but an income play. But the prospect of a new chief executive also means that DSG’s strong dividend – the shares yield 7.4 per cent at yesterday’s closing price – is susceptible to a cut. That danger, and the prospect of further earnings downgrades, means DSG should still be avoided for now.

QXL Ricardo

For a FTSE 250 company whose shares were the single best performers on the London stock market in both 2004 and 2005, 2007 is not turning out too badly either. Even after yesterday’s 3 per cent fall, they have more than doubled since January.

For investors who best remember QXL Ricardo as the British answer to eBay that became enmeshed in a lengthy legal wrangle in Poland, that performance might come as a shock. But QXL has long since resolved those difficulties and is now the dominant internet auction site operator in Eastern Europe, from where it draws three quarters of its sales. Yesterday’s first-half results showed the strength of that region, where, thanks to the rapid roll-out of broadband, revenues were up 77 per cent. Following last year’s push into Ukraine, QXL now has a joint venture in Russia. Together with this year’s launch in Romania and Bulgaria, it now has access to an additional 220 million people.

The beauty of QXL is that it is a business that virtually builds itself. As eBay’s experience shows, such sites quickly become natural monopolies: once established, a market-leading position is hard to disturb. The pace in Eastern Europe will inevitably slow but, even on that assumption, earnings should still grow 60 per cent a year over the next three years.

That means that a 2008 earnings multiple of 41 times, falling to 29 times for 2009, is not too rich – especially given the chance that eBay could swoop. But the shares are likely to remain unsettled on yesterday’s expiry of a lock-in governing Icelandic and Israeli investors who hold 31 per cent. Buy on weakness.

Smiths News

Shares in WH Smith may not have travelled very far since last year’s demerger of its distribution division – less than 6 per cent – but they have fared better than those of its spin-off. As of last night’s close, Smiths News has fallen 3 per cent.

Not that there was much in yesterday’s full-year figures to alarm. A 9 per cent rise in operating profits on revenues up 2 per cent was in line with forecasts and demonstrated the effects of the company’s cost-cutting programme. If there was a caveat, it lay in Smiths’ caution that the magazine market remains tough, although it has detected tentative signs of stabilisation.

Nor can the logic of demerger be faulted. Part of the rationale of the split was to enable the company to win contracts from retailers who might consider WH Smith a rival. Yesterday’s deal with Martin McColl, the 1,400-strong convenience store chain, and a 100-store trial with Tesco, are clear signs of progress. Elsewhere, the company is steadily developing revenues from nondistribution activities.

But the problem with Smiths is that, with a 40 per cent market share, sluggish top-line growth and much of the cost cutting done, there is little to inspire. The potential outcome of three parallel OFT reviews provides a further drag.

It is hard to envisage what will push the shares decisively above their demerger price, despite a 2008 earnings multiple of nine times and a 5.6 per cent dividend yield. Pass.

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