Baugur, the Icelandic group that made a pot of money on the takeover of Arcadia, and more recently popped up as an investor in Big Food Group, has built up a stake in House of Fraser of 7.4 per cent.

Baugur's buying has coincided with rumours that the HoF board wanted to take the department store group. The two moves have given the shares a boost - though they are still way below their previous high.

A bid for HoF, which operates the eponymous House of Fraser stores, Dickens & Jones and Army & Navy outlets (as well as a welter of lesser known stores), may not be imminent. But it is not difficult to see what Baugur has spotted. HoF is valued in the market at £169 million. At the last count, it net worth topped £216 million.

The business looks doubly vulnerable at a time when profits are moving in the wrong direction. First-half figures to July showed losses before tax and exceptional items widening from £1.5 million to £2.7 million.

There were also exceptional charges of £6.7 million relating to the disposal of three stores and associated redundancies, stock clearance charges and other contractual liabilities. There had also been disruption at a flagship Birmingham store that is being revamped.

For all that the underlying trading performance improved slightly, with operational losses cut from £1.5 million to £1.2 million on sales up £8.4 million at £432.9 million.

Other positives to emerge were the fact that sales of fashion products increased 14.2 per cent thanks to the introduction of brands such as 'Replay' in womenswear, 'Elle Macpherson lingerie' and 'Lambretta' in mens' wear. Sales of 'home' products were also boosted by 9.5 per cent.

HoF has been refining and expanding its store portfolio. Not only has it been selling underperformers but, in the past three years or so, it has opened a raft of new ones - at Bluewater, Reading and Bristol.

It has also refurbished stores at Oxford Street, Guildford, Manchester and Cardiff. The refurbishment of the Birmingham store will be completed next year and will see the company trading from no less than 310,000 square feet.

To get sales motoring again, it is pinning its hopes on a new, brand-based strategy. It is introducing brands 'that are desirable, aspirational and international'. It will trial them brands at its top stores. If they are successful, it will roll them out across the provinces.

The company still has its critics. Many analysts and commentators believe that many of its stores are rather dowdy and unimaginative, and lack the innovation of Selfridges or the cosy appeal of Debenhams.

One investment house that follows the stock, Numis Securities, has put out a 'sell' recommendation to clients. It expects profits to ease to £23.8 million for the current year, giving earnings of 6.6p a share and placing the group on a forward price earnings ratio of 11.1.

But HoF looks a good two-way bet. Either the new brand-oriented strategy starts to work or Baugur could step in – or pass its stake on to a third party bidder. With a yield of nearly 8 per cent, the shares have little downside.

House of Fraser

GCI Recommendation

Buy