Ladies clothing retailer Bonmarche today put out a trading update which revised its forecast for the profitability for this year to £5.5m. This is a significant downgrade, as the previous year showed results of £8.0m, and it was hoped that this stock would reside in a good growth area which would be overlooked by the bigger players in the market (a previous broker estimate for profit for this year was in excess of £9m). The market was unimpressed by this update, sending the shares down 20% in early trading:
One remarkable thing that pops out straightaway is that this company was cheap to start with: it is now even cheaper, even on its reduced profit forecasts. As a high-street player, this is remarkably cheap: it has over 300 stores nationwide – that is a large number and just under three times the number of similarly valued companies such as Moss Bros, who also issued a profit warning earlier this year.
Sadly such exposure to retail is not seen as such a good thing nowadays as high rents and declining footfall puts increasing pressure on profitability. But for those not acquainted with this company, perhaps this is a necessary reflection of the customer base: Bonmarche caters towards the more mature lady, who may be less amenable to purchasing online than the younger generation. This approach has generally been successful in previous years, although it is obvious that times are changing and this can affect every business.
The warning comes in a trading statement which placed the blame squarely on the stores:
During the second quarter of the financial year, online sales have continued to grow strongly, in line with expectations, but sales in the stores have not maintained the momentum gained during Q1, and are below expectations. The continuation of warm weather for an extended period may have delayed demand for early autumn stock, but we believe that the more dominant factor is that underlying consumer demand for the UK high street is weaker which is impacting footfall.
We have seen the reasoning for warm weather from a few companies, which translates in less people going to the shops. Whether this means that this trend reverses as the winter approaches is unknown, but Bonmarche are not particularly confident of that:
However, due to the uncertainty regarding high street footfall, we believe it prudent to reduce the store sales forecast for the second half of the year. Planned Group discretionary operating expenditure for the balance of the year has been reviewed and reduced where appropriate, but a measured view has been taken, so as not to jeopardise the ability of the Company to implement improvements designed to deliver growth in future years. As a result of these changes to the store forecast, the underlying profit before taxation for the Group for FY19 is now expected to be approximately £5.5m (FY18: £8.0m).
Given that things were on track in the first quarter trading update, there must be a heavy decline in the forecasts, perhaps one could envisage them setting a target that could be beaten.
The previous update in April has painted a business in good health and well-managed. Online growth has been good – up 34.5%, to almost 10% of takings. There has been good turnover growth, and consistent profits with an excellent return on capital. Shareholders have seen a volatile share price in the past year but longer-term holders would be well compensated as a generous dividend is paid.
The balance sheet shows few intangibles: and net cash projected at £4.0m. Given the profitability of the company this is not an issue, although the cash balance has shrunk significantly in the past couple of years.
There are some worries that investors may have. Like-for-like sales in stores has been negative for the past two years, and is likely to be a third if this profit warning sticks. Some of this slack has been taken up by the increase of online sales, and with a 20% target, it seems that there is plenty of opportunity to boost this figure.
One of the worries going forward is segmentation of the clothes market. Tastes and trends change, and it is harder to simply categorise markets such as ‘female, 40-60 years’. In reality, there is significant overlap between categories. In addition, there is plenty of competition which can target these markets if it so pleases. Competitive advantage from online firms such as ASOS and Boohoo seems based on logistics rather than inherent quality of product.
Cashflow has been negative:
From this we can see dividends are a significant expenditure: at a projected rate of around 9% today, it could be argued that this is not a sustainable expense. Payables are still greater than receivables, and despite no intention to open any new stores (according to the annual report), capital expenditure would still have to continue in systems and upgrading existing stores. Given the woes of other chains it may well be that opportunities can present themselves, so reserving the dividend could be a much needed strategy.
It may be hard to be bullish on this, but evidently Bonmarche have carved out a good niche for themselves: they are far more profitable than the likes of Footasylum on a similar level of turnover. Their business almost has two sides: the online business is growing at a reasonably rapid pace, yet the retail segment appears stagnant.
The stores are a tough proposition at present. We can see that even at a £9m profit level, 325 stores means a rather mediocre profit of less than £30k per store. The company justify the existence as that all stores are profitable on a ‘four-wall’ basis (which excludes arbitrary apportionment of central overheads), but optimising the store estate must be on the agenda. A good proportion of leases mature within two to five years, so this environment should mean that these costs are reduced.
I do feel that Bonmarche are only a poor year away from being in trouble. In the profit warning the total dividend was projected to be maintained at 7.75p for the year, which represents a big payout on reduced profits. Picked up on Stockopedia was the rather strange comment from the CEO:
“Whilst it is disappointing that FY19’s result is expected to be lower than originally planned, despite the challenging market, the health of the business remains strong: excluding the impact of the FX headwind, this year’s underlying PBT expectation would be in line with the £8.0m achieved in FY18.
If the reason for the decline in profit was simply down to adverse FX rates, what kind of instruments could give rise to a £2.5m loss? That would seem out of line for this company. In reality this seems more modest according to the annual report:
A weak dollar is good because pounds buy more dollars (the transactional currency of suppliers). Unfortunately, in the past year the opposite has happened, which is adverse for Bonmarche, but not to this effect.
As a company I quite like Bonmarche. They have previously performed well, they operate in a good niche and there is a decent opportunity to further grow online sales, perhaps allied with a strategy leveraging their strong retail footprint. I do also believe there is quite a lot of risk attached to the shares, perhaps already baked into the price. Further declines in high street sentiment and a weakening pound, together with a maintained dividend payout could leave the company in potentially quite a poor position and as we have seen before, restructuring is not kind to shareholders. I am not too sure how this will play out, so am inclined to go 3/5.