It’s been a rather poor year for formal wear retailer Moss Bros. Logistical problems have led it to issue several profit warnings, and this is before the fact that the retailing climate is extremely tough especially for those who have large store estates. The publishing of its half-year results have resulted in more warnings, and a further reduction of the share price. Having spent the back end of last year flirting with the 100p range, the share could be picked up in early trading for 35p, meaning the company is worth just over a third of its value now.
Readers should need little introduction to Moss: they have a rich history dating back at to 1851 and have a store estate in excess of 100 stores around the UK. Their product offering is fairly narrow in nature: primarily suits and related purchases such as shirts, ties, coats and shoes, as well as tailoring and suit hire services.
This market has been keenly contested in recent times. As most men would know, the price of a suit varies tremendously. Moss’ market positioning seeks to differentiate themselves a little from the bottom of the market, but still choosing to compete on price rather than quality. Generally this isn’t the best plan for a company unless significant value can be added along the way.
The financial results over the past few years show a company toughing it out: on the plus side, they have been managed well, and a continued effort has seen their profits grow. On the downside, their operating margins have been thin at just 5%. Next manage 20%, although the product mix has been different. In recent years they have been paying rather hefty dividends, which haven’t been covered by profits, and as a result their cash pile is dwindling.
The financial headlines didn’t make good reading:
· Total Group revenue, excluding VAT, of £64.5m, -3.3% lower than the previous year.
· Like-for-like* retail sales, including e-commerce were -6.9% lower. E-commerce like-for-like* sales for the first half grew +9.5% on the prior year and now represent 12.7% of total sales (HY1 2017 11.2%).
· Like for like* hire sales, which represents 12.3% of total sales in the half (HY1 2017 12.8%) on a cash taken basis were -7.8% down.
· Retail gross margin at 56.5% was -2.8% lower for the half, of which, the impact of weaker sterling accounted for a -1.8% reduction.
· EBITDA*** for the first half was £3.7m (HY1 2017 £7.0m restated**).
· Adjusted profit before tax1 of £0.2m, was down -£3.7m versus the same period in the prior year (HY1 2017 £3.9m restated**).
· Loss before tax of £1.7m after adjusting items of just under £2.0m (HY1 2017 Profit £3.9m restated**). Adjusting items consist of store impairments (£1.2m) where we have taken a prudent view in respect of a small number of underperforming stores and reorganisation and employee-related costs (£0.8m). The Group considers that these should be treated as adjusting items given their costs
Much of this was expected given the earlier logistical problems. We have seen other companies also report a slowdown in business due to the World Cup and the very hot weather, with people choosing to do other things than shop.
Moss were able to estimate this:
However, as the extended period of hot weather arrived, coupled with the distraction of England’s success at the World Cup, customer footfall reduced in Q2 on average by -7% year on year and in the worst affected stores by up to -14%. Having assessed the quarter on quarter decline in footfall, we estimate that we were negatively impacted by around £2.7m of retail store sales, which would have delivered c. £1.4m of gross profit.
Despite this, it seems that these factors are not one-offs as current trading is still weak: in the seven weeks to 15 Sept, retail like for likes are down 3.9%, and hire is down 13.3%. E-commerce is up 23.3%, although this is going off a smaller base (11.2% of business was done online in the past year. Moss have stated that growth in the new tailoring service and the new range have produced some offsetting, but there are no numbers behind this.
The profit warning is as such:
Although current trading is showing a steady and improving trend and the Board recognises it is possible to mitigate the footfall related gross profit shortfall of the summer via short-term cost cutting, we feel it would be detrimental to the long-term health of the business. This decision to continue to invest means that the Group is still on track to deliver an operating profit before adjusting items, but materially lower than current market expectation of £2.3m.
It is fair to say that Moss Bros glory days are well in the past. There have been some significant changes that come to my mind, none of which have been helpful to Moss. Competition has come from virtually every corner, from the department stores to general retailers such as Next, Uniqlo, Zara. Firms such as TM Lewin expanded in the mid-2000’s offering perceived quality at lower prices and began to aggressively target the online market. More recently, tailored suit companies have also popped up on the internet.
In general the average suit has declined in price tremendously. The hire market existed in part because purchasing a special item such as a tuxedo was a big-ticket item. In today’s market this is no longer so. There are genuine needs (for example weddings), although the trend for this doesn’t seem to be growing.
Moss are also left with a large store estate which is vulnerable to rising costs, such as rent reviews and wages. In a climate of declining sales this is particularly acute as expenses make up a greater proportion of turnover. The missed sales it was bemoaning earlier would have cost nothing apart from the cost of the product, as the staff were already employed, and the rent was already paid on the store.
However, it is not all bad news. Moss carries a significant amount of cash (£15.2m) albeit slowly declining through its dividend policy and no debt. Their balance sheet is also healthy, with few intangibles and liabilities outweighed by tangible assets. It could even be the case that dividends disappear altogether here, as the new policy states that they have to be covered. No profits = no dividends. The cash in the bank provides a nice guarantee that lenders cannot pull the plug on the company. It seems likely that there is enough to ride out the bad storms for a couple of years at least.
The market is fairly savage for retailers at the moment, and there is little respect for history: businesses such as Debenhams and Mothercare were both highly regarded at one stage but have been reduced to virtual junk status. This has led to some compressed valuations. Moss is worth around £45m at the moment, despite having cash of £15m. But there is good reason for that. The board has remained bullish citing that it is EBITDA positive, but that figure is an adjusted one and is only worth £235,000.
There seems to be little respite in the underlying conditions, so the question is will Moss becoming loss making, and if so what happens when pressure is put onto the cash position? Much like Footasylum, currently there is no danger but also there is no compelling need for anyone to use Moss Bros. Their own suit offerings are not particularly differentiated, and they also sell brands such as French Connection/Ted Baker which can be picked up at other stores.
It is difficult to really envisage a scenario of a massive turnaround. The tailoring division potentially could be a part of that. Previously the preserve of the rich, there is no real reason why a store such as Moss could not offer a cut-down version of this, perhaps with increased lead times (as the suit would need to be sent to a cheaper place for the work to be done).
The trouble is with this is that it would require a decent amount of set-up costs to get an operation that could penetrate all its stores, and that the advantages are not inherent with first-movers: other operations could simply replicate it. Even if that was not the case, could Moss gamble with its remaining cash pile?
I am rather bearish about the whole situation. The Board stated:
Although current trading is showing a steady and improving trend and the Board recognises it is possible to mitigate the footfall related gross profit shortfall of the summer via short-term cost cutting we feel it would be detrimental to the long-term health of the business…
The trend here though is based upon the previous period being affected by weather, World Cups and logistical issues; therefore an improvement means very little. Furthermore, from my anecdotal evidence, cost-cutting HAS already happened. Moss are fairly prevalent on the Hotukdeals pages, and they seem to be always in perennial ‘sale’ mode.
It is just difficult to see where good growth is coming from here. In the best case scenario, trading may recover to near previous levels, but historically its price/earnings ratio has been extremely high (a market cap of close to £150m at the start of the year), and given the strife of this year, it is not worthy of such a high rating.
In the worst case, we might simply see the cash run out – not immediately of course, but over the course of a few years, and Moss to join the ranks of other companies that ceased to exist – and to be truthful the High Street would not be that much worse off as their products (or substitutes for them) continue to be available elsewhere. I think that is the more likely scenario, but the cash pile prevents me from assigning it a bottom rating – there is enough left for a gamble.