October was a little bit of a difficult month for the market; we had some unseasonably warm weather

Nigel Hall Finance director Arcadia Group

Arcadia, which owns leading chain stores such as Burton, Top Shop and Dorothy Perkins, said sales in its main brands gained 9.4% during the 19 weeks to 5 January compared with a year earlier.

Cold weather boosted sales of winter clothes following a lacklustre autumn.

"October was a little bit of a difficult month for the market; we had some unseasonably warm weather," said finance director Nigel Hall.

"We saw strong trading in November and that built through December."

Gross profits were also up, rising 1.1%.

Baugur already owns 20% of Arcadia

The company said the rise came after it had reduced its retailing space by 3.5%, removed unprofitable brands and stores, improved supply chain efficiency and slashed debts.

Problematic bid

Baugur, which is already a major shareholder in the Arcadia group and which operates as its Scandinavian franchise partner, has yet to put a formal bid on the table.

"Arcadia Group does not expect... discussions to be concluded before the end of January," the group said.

The smaller Icelandic retailer has signalled willingness to pay in the range of 280-300p per share.

That may not be enough to convince Arcadia's board of directors to accept the bid, not least since the stock was trading at 277p soon after the trading statement was released, said some analysts.

Others pointed to widespread worries about Baugur's ability to raise sufficient finance to complete the deal.

"Whether they are able to finance [a bid], what effects movements in the share price will have on the prospects, is really something I can't comment upon," said Mr Hall.

By mid-morning, Arcadia's share price had fallen 3% amidst such worries.

Return to profits

Investors already knew that Arcadia was performing well ahead of the trading statement, which explains why the share price failed to rise.

In October, the group reported pre-tax pre-exceptional profits of �53.3m for the full-year, against a loss of �8.5m a year earlier.

The turnaround in the company's fortunes followed a massive restructuring effort launched in April.

By the middle of October, the company had sold some of its chains, including Principles, Warehouse, Racing Green and Hawkshead, to Rubicon Retail for �35m.

Following the restructuring, the company said it would focus on its core brands, which include Dorothy Perkins, Burton, Evans, Wallis, Top Shop/Top Man and Miss Selfridge.