Big Sale At Harrods?

Its controversial owners may offer shares in the London store

On a normal Thursday morning outside Harrods department store in London's tony Knightsbridge section, more than 100 people are waiting impatiently for opening time. For Californian Patricia Underdown, 55, Harrods is a must-see destination. "I've heard all about this place from my husband. He says we could shop all day, have breakfast, lunch, and dinner in different places, and never leave the store." True to its motto of "all things, for all people, everywhere," Harrods has 18 restaurants located throughout a labyrinthine 25 acres decorated in everything from Egyptian sphinxes to a bizarrely impressive towering sculpture of fresh fish in the Food Hall.

The grand British institution and tourist mecca may soon be using its name to attract investors as well as shoppers. Harrods is considering going public, says a spokesman. Sources close to the deal say the possible flotation would be for 20% of Harrods shares, which could raise as much as $600 million. Such pricing implies a value for the company, which includes real estate, of up to $3 billion. Sounds exciting--if the stormy past of the store's Egyptian-born owners, brothers Mohamed Al Fayed and Ali Fayed, doesn't get in the way.

In the 11 years since they bought Harrods, the Fayeds have clashed with tycoon "Tiny" Rowland, who coveted Harrods, too. Trouble also erupted over a damaging 1990 government report on the brothers' background and source of financing. And Mohamed Al Fayed was embroiled in a 1994 controversy involving Tory members of Parliament who allegedly asked questions in the House of Commons on Mohamed's behalf.

In all these affairs, the Fayeds have never been found guilty of any criminal offense. Still, some analysts believe this turbulent legacy could depress the price of an offering or hurt the shares later if more squabbles occur. Neither brother would comment, but a spokesman dismisses such fears as groundless.

The decision to float stock will come this fall. Few dispute that the timing looks good. Pretax profits for the company, Harrods Ltd., are expected to rise 28%, to $112 million, on sales of $770 million in the year ended Jan. 27, 1996. A $3 billion valuation for such a small retailer sounds oversized, but there is a precedent. Another luxury London retailer, apparel store Harvey Nichols Group PLC, went public in April and is now trading at 26 times 1997 estimated earnings. Other purveyors of luxury, including Gucci and Investcorp International, the parent of Saks Fifth Avenue, have also gone public of late.

"WELL-MANAGED." Harrods has improved its operation under the stewardship of the Fayeds. Under its former owner, the holding company House of Fraser, Harrods was used as a cash cow to support other stores in the Fraser group. The Fayeds, in contrast, have plowed $385 million into renovations, opening two new floors of selling space and restoring the interior's original Edwardian look.

Today, the store has possibly the highest sales per square foot in Britain, according to David C. Beale, director of consultant Management Horizons Europe. It has high margins of 14.4%, according to consultant Verdict Research, vs. just under 12% for Selfridges, the most comparable store in London. "Harrods is a very well-managed brand," says Beale, who sees no reason to worry about a flotation's success. "It would be well-received by the market."

The Fayeds have big plans for the money they may raise. A Harrods warehouse will be converted into a five-star hotel next to the store. Also likely is an expansion of their chain of Signature boutiques, which sell Harrods-brand merchandise at such locations as Heathrow Airport and on board luxury liner Queen Elizabeth II.

If the Fayeds do manage a successful offering, it will be because investors end up sharing Joanne Clapp's attitude. "It doesn't matter to me who owns it," says Clapp, a high school teacher from Cynthiana, Ky., as she gathers her students to enter the store. "We're just here for the experience."

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