Only support to DSG is vague bid hopes

The company's recent trading statement - for the 16 weeks to August 23 - highlighted just how it is being punished. Admittedly, the economic backdrop is doing it no favours, but it is likely that the business would still be under intense pressure in a relatively benign general retail market such are its structural issues.

Like-for-like sales declined in all areas of the business with a fall of seven per cent recorded across the whole company, which compares with an increase of six per cent during the same period last year.

What was particularly worrying was the relatively meagre six per cent increase in like-for-like sales at arguably the most important part of its business for the future - its e-commerce arm. With the same uplift delivered last year, this translates into a fall-off in growth.

This is especially bad when compared with the performances at many of the online-only electricals retailers. Take Easycom, which operates sites including Laptops Direct and Direct TVs. It has enjoyed a 60 per cent growth in unit sales and a revenue uplift of 40 per cent since last year on maintained margins.

Operators such as Easycom have much to thank DSG (and the other high street electrical retailers) for because they have so poorly executed their online strategies that the door has remained open for the pure-play specialists to build-up substantial businesses.

Despite the massive values of their brands, which can easily be translated online, they have still failed to capitalise. DSG took the sensible step of buying internet retailer Pixmania but it has not leveraged any of the company's knowledge into its other web businesses. To have failed to do this most obvious thing suggests a lack of understanding of how online retailing works.

Things like search engine optimisation and call centres still seem very alien to the likes of DSG but maybe with the internet expertise of chief executive John Browett things will gradually be turned around.

An interesting move would be to utilise its stores as collection points for goods ordered online as this would give DSG a major point of difference with its online-only competitors and solve the last mile issue that remains the thorn-in-the-side of all retailers that offer home delivery.

The big question, however, is whether Browett will be in the job long enough to implement such a bold move because the talk now is of potential bidders emerging for DSG. Germany's Metro (that owns Media Markt) and US-based Best Buy are the names in the frame, with DSG having supposedly held talks with the former.

Despite this it seems unlikely that anything will happen in the short term because DSG will continue to suffer from poor trading and this will in turn continue to push its valuation downwards.

With the view that bid hopes therefore look forlorn Pali International reckons the group's current share price of 58.75p gives it a rating that is unsustainable. As such it sets a target price of a lowly 33p, which compares with the 44p it attributes to a sum-of-the-parts valuation.

The only conclusion that can be drawn is that there is plenty of downside to DSG shares as the company succumbs to a triumvirate of issues: the economic downturn, the company's specific structural problems, and the likelihood that all the current talk of a takeover will fail to get beyond the rumour and speculation stage.