Firstly as I am you may have noticed, if you live in the UK, it has been really mild recently for the time of year. For example I heard on the weather the other day that the overnight low was going to be around 12 c which is more like a night time in July not December. Mind you given our summers are sometimes like winter perhaps that's not so surprising!
This is normally bad for clothing retailers as their winter lines then fail to sell in the expected volumes. Thus today we have had the first, presumably of a few profits warnings, from clothing retailers. Bonmarche (BON) the Women's wear retailer in warning about their profits. said:
"In the Company's Interim Results report published on 23 November, the Board stated that, provided trading conditions normalised for the remainder of the financial year, its expectations for the full year would remain unchanged.
Trading conditions during December, particularly since "Black Friday" on 27 November, have been very challenging, and have not normalised. The Board's view is that these trading conditions are likely to continue for the remainder of the winter season and it has therefore revised its profit expectations for the current financial year. Given the ongoing volatility of trading conditions, the Board considers it likely that the PBT will be within the range of £10.5m to £12.0m.
Since they are also referring to Black Friday I guess this could also have wider implications for the retail sector beyond just clothing, but given the weather I'd expect other clothing retailers downgrading their expectations. This could include Next which features in the Compound Income Scores Portfolio (CIS) and I note they have been weak this month. While WH Smiths should be less exposed unless the Black Friday sales have really damaged the Christmas trade for everyone.
Meanwhile there was a really mild update today from another CIS Portfolio holding, RM Group (RM.). I say really mild because at least it wasn't a profits warning, but a very brief statement saying that they were trading in line with expectations. They also updated on their cash balances, which were up, as they had guided, to £48.3m versus the £43.1m that they last reported.
Against this they updated on their Pension deficit after the latest triennial review. They say this saw it fall from £53.5 in 2012 to £41.8m at the 31st May 2015, although strangely this is up from the £30m that they mentioned in their interims which were also to the 31st May 2015. I guess this reflects a more detailed look at the liabilities and perhaps some conservative changes to the assumptions underlying it. They also mentioned two payments of £4m so I guess £8m could come off the cash balances and the deficit recovery payments remain at £3.6m per annum up to 2024 rather than 2027 presumably reflecting the £8m they are putting in upfront.
So this is the main change since I last wrote this one up in detail and the higher deficit could therefore detract slightly from the value case. Since the new deficit figure and the remaining cash, after the recovery payments, should roughly match lets just look at it based on the market cap rather than a reduced enterprise value due to the cash. This is more conservative, although it could argued that if they had to wind the company and Pension fund up today that it would cost more than that, but it seems a reasonable compromise as it is still a going concern.
On this basis they have a market cap of around £140m and they are expected to have turnover this year of around £180m on which they are currently making margins of close to 10%. My rule of thumb on this is that each 1% of margin is usually worth around 0,1x on an EV/ Sales basis. So here taking the market cap. as the EV due to the pension deficit we get an EV/ Sales ratio of 0.8 suggesting that it could be perhaps 20 to 30% under valued on that measure.
Taking a possible operating profit of say £18m based on those turnover and margin assumptions gives a decent EBIT/EV yield (Mkt. Cap. in this case) of 12.85% and also suggests they are cheap. While more conventional measures such as PE and yield are around 11x and 3% at the current price of 165p or so. The share price and estimates are all pretty much unchanged since I did the detailed write up mentioned above, so it seems I was right to call it rather mundane, although to be fair the market is down by about 4% over the same time frame.
Thus, although the pension deficit is now slightly larger than at the interim stage, this is at least settled for the next three years until the next review and the cash payments etc. seem to have offset this effect. Even ignoring the cash to net off against the Pension liability still leaves them looking quite good value based on the metrics discussed above. It still scores 97 on the CIS & coincidentally the same on Stockopedia's Stock Ranking system.
However, despite this, the price is characteristically flat again this morning so it doesn't look as though the market is going to re-rate it any time soon, but I guess time will tell and it seems patience will be required with this one.
...or a couch potato for that matter. The reason being that I'm getting of the sofa to bank a decent profit that I have made in SCS Group (SCS) which I wrote up a few weeks ago when I looked at some cheap but low quality retailers. I did take a small position in this one in the end for a trade, although at the time I said it was probably not a long term holding.
With the shares ex the 11.2p final (worth 5.74%) I'm jumping off the sofa to bag a tidy trading profit and decent total return, despite the fairly horrendous spread of around 5% on this one!
Looking at the chart the fall on the xd today has brought the price back towards its 200 day moving average which might provide some support and could therefore perhaps maintain the nascent up trend. I also note that there is still potential to close the gap which opened up at around 220p.
So as consumer spending seems to be on the up on the back of increasing real incomes then may be this one could still have a bit of mileage in it yet given the 11x PE and 8% plus yield, although as I said I would rather bank my profit now than take the risk on their all important Christmas and New Year sales period, but who know if this goes well then maybe it could see some upgrades and get to 220p.
Any way that's all I have to say on this one other than to leave you with a couple of adverts. The first one is from ScS in which they seem to be claiming to be 40 years old I assume, although I'm pretty sure they went into administration not so long ago. So not sure how that works apart from somebody having bought the name from the receivers perhaps?
After that is an alternative way of selling furniture with Skippy - enjoy, I've got to hop off now and do some exercises, so you see I'm really not being a Lazboy!
..as we have had a few results from small cap. stocks today which I have mentioned in the past. The first one was one I wrote up recently when I looked at some "cheap" retailers, SCS Group the sofa and carpet retailer. They announced final results today which looked OK and had a reasonably upbeat current trading statement, but with a hint of caution going forward given tougher comparatives. They are however opening new stores and concessions in House of Fraser so this should help to boost overall growth.
The numbers saw revenues which seemed a little behind forecast but the adjusted earnings came in ahead at 13.75p which is also ahead of the current years forecast. Given this and the positive start to the current year I guess this may leave scope for upgrades which is usually positive for lowly rated stocks such as this one trading on 11.4x at 157p.
On the dividend they achieved their IPO goal of a 14p dividend with an 11.2p final in these figures. This alone gives a 7%+ yield while the forecast unchanged 14p for the current year potentially gives a near 9% yield. This is backed up by £21.2m of cash on the balance sheet. So with a positive start to the year against an improving consumer background this one should be OK in the short term. However, as it is not the great quality and did go bust in the last recession it may not be one for the long term.
However in brief talking of quality for the long term we also had another set of record results today from the AIM listed flooring provider James Halstead (JHD). This is a good quality company but it is expensively rated at 25x given the quality and the steady delivery of rising profits earnings and dividends in recent years. So I'd definitely suggest holding this one for the long run, but it might be worth waiting for another downturn to see if you can pick it up more cheaply if you are not currently in it.
Finally on the talk front I note some interesting results from Netcall (NET) a software as a service provider in the customer engagement sector or contact centres to you and me. The results seemed to be in line but the main surprise was on the dividend where they announced a 2.2p dividend against the 1p full year dividend expected which unusually they pay jsut annually. This did however include an in line 1p payment plus a special of 1.2p which is part of a three year plan to bring their cash down £10m. Again not the cheapest in the world with a PE of 18 to 19x but it does now sport a 4%+ yield with the special dividend. It also seems to be reasonable quality and is currently trading well so might be worth a closer look.
One of my readers was bemoaning the fact that they couldn't find any bargain in the market despite the recent set back. So I did a bit of digging around and found some cheap looking small retailers that I have come across, although I stress I am just pointing them out - not recommending them - so you should do your own research if they interest you.
Now this is topical because after a soggy August in the UK the BRC are suggesting that retail sales slowed to crawl as a result with clothing retailers expected to be hit the most. However the report from Reuters does suggest this may have been a blip due to the late August Bank holiday which meant that back to school spend and summer furniture sales were not included.
Any way with that background I thought I would start by highlighting a furniture retailer which came back to the market earlier this year having gone bust previously. If that doesn't immediately put you off the stock concerned is SCS. Now they rather blotted their copy book or stained their sofa as it were when they warned about a General Election slowdown just after they floated. This caused the shares to fall below the issue price and as you can see in the chart below to be offered at up to 40% off their recent highs like one of their regular sales in store.
While you can't buy the shares on interest free credit, the interesting thing is that is seems to have been building a base around the 140p level and since then they have updated on trading over the remainder of the current year to the end of July. In this they confirmed that they trading in line with the down graded forecasts and were committed to paying out a big dividend. Thus if forecasts of a full year dividend of 14 pence are correct, this suggests they should pay a final dividend of 11.2 pence as they paid an interim of 2.8 pence back in May. Thus at a price of around 160p they would be yielding 7% on the final alone and a whopping soar away 8.9% if they maintain the dividend next year too. If they manage to hit next years earnings forecasts too then it may be on less than 12x, but obviously no guarantees with this one.
So obviously not a quality play and they earn pretty thin margins and slipped up just after floating, but could be an interesting high risk play on a pick up in consumer spending on the back of increasing real earnings and falling petrol and heating costs. I also note the gap on the chart at just under 220p which often get filled so this could be a medium term target perhaps if they can get back on track. There was also a good write up by Edmund Shing here on Stockopedia earlier in the year if you want to read more about it.
Now if that is not down market enough for you then you could always slip down the high street and treat yourself to some cheap shoes from Shoe Zone (SHOE). This is another cheap retailer that came to the market not that long ago and has also had a profits warning and price collapse more recently. In their case rather than blaming the election they trotted out ye olde weather excuse and apparently the wrong type of ladies boots (ankle) being favoured, although with less imitation leather I thought they would have been higher margin than knee boots?
So on the chart it is a similar picture to SCS with a gap this time at just under 260p versus the current 170p or so price. At this price it trades on maybe just under 10x with a forecast yield of 5.5% or so. I say maybe because it is an October year end and we have just had a poor August, weather wise in the UK, so I guess they could be vulnerable to another profits warning perhaps on the back of that as they blamed the weather for the last one. So on that basis as I'm not that keen on their stores or their shoes I'm not sure I can get that excited about the share either, despite the apparent value. But again their was a more bullish write up on this one on Stockopedia recently if you wanted to get more detail on it.
Finally if Sofa's and shoes are not your cup of tea then everyone's got to eat and drink right? So despite this the food retailers have been going through the wringer in recent years as competition from the German discounters Aldi and Lidl has "Mullered" them. Thus the only part of the sector which has been growing has been their high street or convenience type shops which, apart from Morrisons who were too late to the party, have been a reasonable success for the majors.
Now the main casualties of this dual pronged expansion of smaller store by the Germans and the major UK food retailers has probably been your typical high street / corner shop / convenience store which doesn't have the range or the buying power to compete. However there is one chain of these that has been expanding by buying up failing community Newsagent shops (CTN's). This one is McColls (MCLS), another recently listed retail group with a share price chart that has, perhaps unsurprisingly, been heading in the wrong direction too.
So there is a bit of a pattern emerging here, recent new issues not having done so well, which is one reason why I don't generally participate in new issues unless they are being priced to go. This is because they are usually coming to the market because the owner / managers think it is a good time to sell. This one has therefore, without a profits warning as far as I can tell, drifted down to about 10x with a 6.5% yield which may be about right / fairly full for the limited growth that is now being forecast.
Of the three I can just about see the case for this one where they are buying up small failing stores and improving them by rebranding and offering more in the way of groceries and alcohol. They also seem to be favouring neighbourhood or community stores as far as I can tell which I guess benefit from the localised monopoly and laziness or inability of their clientele to go to a supermarket perhaps 5 minutes down the road maybe? Again if you want to read about it in more detail there was a good article in the Midas column in the Daily Mail recently.
*Beware they may be cheap for a reason and because of that I cannot recommend a purchase, but as I always say you pay your money and take your choice. Talking of which on a related matter see this classic video below and read all about it if you are too young to know the story or are not familiar with it.
..as it is that time of year when they provide their Christmas and year end updates. Well I'm sure you have all heard and read about the on going Tesco turnaround (?) plan and I'm sure there will be millions of pixels put forth about it today so I'll keep it brief on that one. The main shock was the passing of the final dividend + disposals as they seek to repair their balance sheet that way rather than having a rights issue. On balance I guess that's preferable to avoid diluting any recovery with millions of extra shares, but not one I'm tempted back into.
After my inflation versus deflation post yesterday I had a crazy idea. Perhaps with all their surplus land bank which they don't want to build stores on perhaps they should go into Housebuilding and build Tesco towns on them instead! At least they would earn better margins and have some price inflation. Or perhaps someone should raise a fund and go round buying up the surplus sites off of the food retailers before getting planning and then building them out a bit like Inland Homes do with brownfield sites?
Any way I digress also today we had that other retail institution Marks & Spencer reporting today. They looked like they missed expectations on food and general merchandise in particular with -5.8% LFL. Naturally they blamed the weather but they also had some distribution problems apparently. I can't get excited about this one either as the dividend has been flat to down since 2009 and they have struggled to grow earnings since 2010.
So plenty of worries in retail land and with Boohoo.com disappointing yesterday it seems the weather or whatever is still causing problems for general retailers in the latest period. On that note my attempt at value added today is to suggest you mind your eye on N.Brown (BWNG) if you hold that one. At their last Q3 IMS they reported slightly better numbers, but these left them still down on the year to date. Forecasts are for turnover to be up at the full year which leaves them a lot to do in Q4 which as we know has been tricky for most retailers that have reported so far. The shares have rallied strongly since November and I reckon they could be vulnerable to a poor update and further downgrades, but of course I could be wrong. If I was a spread betting man I'd be tempted to open a short, but as I'm not I won't.