Long-term shareholders in Topps Tiles need no reminding of the specialist retailer’s formidable track record.

The sum of £1,000 invested in the shares at flotation ten years ago would have been worth £28,220 on September 30, the close of Topps’s financial year. Over that period, earnings per share have grown more than 800 per cent, while the company has returned more than £200 million – or the equivalent of two thirds of yesterday’s stock market valuation – to shareholders through dividends and share buybacks.

Followers were more inclined to look forward than back on yesterday’s release of full-year numbers, with the disclosure of a slowdown in like-for-like sales growth in the UK to 1.1 per cent over the past seven weeks – against 3.3 per cent last year – sufficient to exacerbate fears over Topps’s susceptibility to a DIY slowdown and sending its shares down nearly 10 per cent. They were also unsettled by the decision of the 300-strong chain to slow the pace of its UK store roll-out programme, which had provided much of the momentum behind profits, as it nears its target of 400. It will open a minimum of 20 outlets a year, against 30 previously, although Topps pins that revision on the availability of sites rather than consumer demand.

Topps has long professed that it is partially protected from a housing slowdown by customers opting to refurbish their homes rather than move, and the low level of the average transaction value in its stores, of £64, would appear to bear that out. Investors should also be mindful of Topps’s low operational gearing. Its business model is pegged on an ability to secure marginal sites at cheap rents, keeping fit-out costs low and paying staff an above-average element of commission, such that fixed charges are covered three times by operating profits. Together with net margins of above 20 per cent, the highest in its sector, those traits have meant that even when, as two years ago, like-for-like sales dropped by 10 per cent, operating profits still rose 30 per cent.

If there are weaknesses, these may be more pronounced overseas, where Topps’s immature 20-store portfolio in the Netherlands enjoys fewer economies of scale than its domestic base. This month’s purchase by Travis Perkins of Tile Giant, a smaller rival, may also prove troublesome, given the deep pockets of its new owner.

Even so, a current-year earnings multiple of 9.6 times and dividend yield of 6.8 per cent appears too cheap. But, with the likes of Kingfisher due to update investors tomorrow and sentiment set to remain against DIY stocks for the short term, the shares, at 164¼p, are best avoided now and revisited in the new year.

KCom

The credit crunch appears to have done little to dampen speculation that the former Kingston Communications is a possible private equity target since Hull City Council broke its historic link six months ago by selling its remaining 31 per cent stake.

The predictable cashflows from its residential business are seen to make it an obvious target for a financial buyer. Such speculation has not stopped the shares falling 25 per cent since then, while yesterday’s half-year figures did little to ease the pressure on Malcolm Fallen, chief executive, to break up his charge.

The numbers were broadly in line with forecasts and management sought to underline its confidence with a hefty rise in interim dividend of 45 per cent.

But pre-tax profits were down 48 per cent to £5.3 million and the company felt compelled to reiterate September’s warning about its exposure to the financial services sector, where it works with big banks and insurers. No contracts have yet been cancelled, although KCom – which today generates more than 90 per cent of its revenues from the business telecoms sector rather than from residential consumers in Hull – is bracing itself for some work to be delayed. But the company is just as likely to use its cash to consolidate its sector rather than fall prey itself. This means that, even with the shares near a 12-month low and trading at just nine times 2008 earnings, they are best avoided for now.

Bloomsbury

Every period of stock market volatility throws up anomalies in valuation, but few can be as extreme as that at Bloomsbury. Shares in the book publisher have fallen 25 per cent over the past month, and 16 per cent in the past week alone, despite the fact that the company has said nothing new since September’s first-half results. Indeed, the only intervening Stock Exchange announcements have been those detailing directors’ buying of shares. Such has been the sell-off that, at yesterday’s 120½p, Bloomsbury trades at just four times this year’s earnings once the company’s forecast year-end cash of £40 million has been stripped out. Even allowing for the halving of forecast profits next year from the absence of Harry Potter, that still, minus cash, equates to eight times 2008 numbers on Dresdner Kleinwort’s estimates.

True, those who rode the JK Rowling phenomenon might feel little reason to revisit the shares until the postPotter future becomes clearer. And predictions of earnings growth of only 2 per cent in 2009 do little to enthuse. But Bloomsbury is free of the debt of its media sector peers, while the small-ticket nature of spending on books should provide a degree of insulation against a consumer slowdown. The Harry Potter box sets should sell well this Christmas, as might the likes of The River Cottage Fish Book. The launch of online reference databases and the final Potter paperback also provides hope for next year. Worth a look.

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