Knight Vinke Patience Snaps as Darty Profit to Miss Estimates

Darty Plc’s largest investor plans to exercise its right to install a representative on the board of France’s biggest electronics retailer, losing patience after the company warned that annual profit is set to miss estimates.

Knight Vinke Asset Management LLC, which owns 25 percent of the stock, said it will take the action after Darty’s failure to implement all the strategic changes it recommended in July.

“We fail to note any increased sense of urgency in its deliberations, despite a deterioration in the trading environment that was not unexpected,” David Trenchard, vice chairman of Knight Vinke, said today in an e-mailed statement.

Knight Vinke has an eight-point plan for Darty which it has discussed with the board. While most of it has been implemented, including the appointment of a new CEO and chairman, a name change, a 20 million-euro ($27 million) cost-savings goal and the appointment of Goldman Sachs Group Inc. as advisers, the activist investor has also asked it to eliminate money-losing businesses, which the board says it plans to do.

By taking a board seat, Knight Vinke is aiming to “speed up the process,” said Kate Calvert, a retail analyst at Cantor Fitzgerald. “Sometimes negotiations to get rid of businesses can take longer than expected. We’ve always felt restructuring would create shareholder value, it’s just how quickly.”

Knight Vinke is also calling for a share repurchase funded by a partial sale and leaseback of property, and for all staff to have the opportunity to become shareholders.

Shares Slump

Darty shares fell as much as 16 percent today, the most in more than four years, after the retailer said it will probably miss profit estimates for the year ending April 30. Sales “softened” at the end of the third quarter, while high levels of promotional activity are harming profitability, it said.

Adjusted pretax profit is unlikely to reach the lower end of analyst estimates of about 30 million euros, it said.

“Overall this is a weak update from Darty given softening market trends at the end of the period,” Georgina Johanan, an analyst at JPMorgan Cazenove who has an underweight recommendation on the stock, said in a report. “Given the magnitude of the potential downgrade, maintenance of a flat full-year dividend is looking increasingly less likely.”

The retailer said in December that subject to performance it intended to maintain its dividend for the full year. The total dividend for the previous year was 3.5 cents a share.

Darty shares fell as much as 8 pence to 41.75 pence, the biggest intraday drop since October 2008. The stock was down 6 percent at 46.75 pence as of 12 p.m., giving the company a market value of about 246 million pounds.

Unprofitable Businesses

The retailer has vowed to eliminate losses in unprofitable businesses in Spain, the Czech Republic and Slovakia and has sold its Italian unit to ease the profit decline.

Gross margins, a measure of profitability, narrowed by 1.1 percentage point in the third quarter, Darty said today.

“We can’t expect any material improvement in the coming year and I think there will continue to be pressures,” acting Chief Executive Officer Dominic Platt said on a conference call. “The consumer is tightening its belt in difficult circumstances and responding perhaps more to promotional activity and I think that will continue in the short term.”

The executive said that while November was “tough,” the run-up and through Christmas was good with strong sales of multimedia items such as tablet devices, which “gave us some hope that things were going to be in line with expectations.”

French Economy

“What we’ve seen at the end of that peak season, people are returning perhaps to type, the economy in France isn’t getting any better, and people are responding more to promotions,” he said.

Sales at stores open at least a year fell 0.5 percent, following a 3.4 percent decline in the second quarter. Sales in France gained 0.4 percent on the same basis, compared with the prior quarter’s 3.2 percent decline.

The company announced this month that Regis Schultz, the former manager of French furniture and electronics retailer BUT SA, is taking over as CEO in May.

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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