Fool.co.uk - Investments

Guess (NYSE: GES - news) what!? Women are still buying clothes it seems. Not only that, but they're going into shops to get them.

OK, I'm being facetious, but six months ago you could have been forgiven for thinking that there'd have been tumbleweeds blowing down Britain's High Streets by now. Consequently, many retailers hit valuations that built in no room for recovery. In other words, they were priced as if they were already bust.

Dog eat dog

But those that survive will prosper; such is the dog eat dog world of retailing. When I last wrote about ladies clothing retailer Alexon (LSE: AXN) in April, the shares stood at a smidgeon over 30p. Since then, they've been over 60p, but are down quite heavily today to 40p on worse than hoped for interim results for the second half to the end of July.

Since April, the company has rid itself of the loss-making Bay Trading chain of shops which were aimed at a younger audience -- and decided to focus fully on the more resilient (it is hoped) older, more 'classical' market. Today, Alexon owns six womenswear brands including Ann Harvey, Kaliko, Alexon and Minuet. The Alexon label "captures an independent career woman who loves the luxury of modern fabrics" apparently, with "smart, versatile separates for the fashion aware customer. Clean lines, easy silhouettes and modernist styling define the collection".

The tills aren't ringing

But it hasn't been "capturing" quite enough of these independent career-minded women it seems. Today, Alexon totted up its tills and had to report a loss for the first half and decided to waive the dividend to preserve cash. It was pretty bad news across the board. Turnover was down 11% at £77.7m, like-for-like sales down 12.6%, and gross margin down 1.9%. Profit before tax and exceptional items came in at £0.9m and trading since the turn of the half year has been "challenging".

Obviously, we shareholders were hoping for much, much better. After all, without Bay Trading, Alexon's operating profits would have come in at over £10m on a £250m turnover last year. But retailers today don't have the luxury of "coulda, woulda, shoulda" unfortunately. It's all about what happens from here.

Reasons to be cheerful

And on that front, there are a few reasons to be cheerful. Firstly, from a valuation point of view, the market still isn't offering much hope of the company being a viable, successful business. At 40p, the fashion group is valued at a little over £18m, so it still offers a huge amount of upside if it can get its house in order and we see a reasonably sustained recovery. On that score, there is some encouragement to be taken from today's news. Capital expenditure, working capital and operating costs are being rigorously controlled; overall performance is stabilising and is being aided by some recent initiatives including new store and concession refits as well as increased space. Meanwhile, the company remains "fully confident" that the Alexon brands are uniquely positioned to reach customers in what is a growing sector.

A gamble worth taking

We shall see in the fullness of time. For my money, Alexon remains a gamble well worth taking. But it is still a gamble. Net debt of £1.4m and net tangible assets of over £6m don't offer a great deal in the way of downside protection if trading continues to deteriorate. And it's clear that the trading environment is tough. Also, operating margins are thin. Add to that a drop in like-for-like sales, plus the large gross margin drop incurred by weakness in the pound and you can quickly see how and why fashion retailers are struggling.

But it's also clear that Alexon isn't about to go under just yet and that it is weathering what is hopefully the worst of the storm reasonably resiliently. An investment today is largely one of belief that the management's strategy will gradually deliver improved results -- and that the factors beyond the company's control will become more benign. I think and hope that both these things will happen and that today's valuation will look ludicrously low in a few years' time.

David owns shares in Alexon.