Potentially ruining Friday afternoons for investors up and down the country, fashion chain Quiz posted a late profit warning this afternoon, showing that profit for FY19 would be under that of market expectations. The market was understandably savage, and shares rapidly declined, and there could be a true case of ‘saved by the bell’:
At close, the stock had lost over a third of its value, and there could very well be a case of further drops happening on Monday morning. Like we saw with the recent Royal Mail warning (and subsequent weakness), there is little point on putting out a warning so late – the market will catch up regardless.
Quiz is a relatively new business and started in 1993. The business could be best described as a multi-channel brand for women, selling in its own stores, online and through concessions in other stores such as Debenhams and House of Fraser. You are more likely to come across Quiz via a concession as these outnumber stores by almost two to one.
The brand focuses on younger women in the value category (perhaps sitting slightly above store brands but below the premium ones). Its smaller size arguably gives it a few advantages: it can move quickly to changing trends and the concession store format allows expansion without onerous leases.
Quiz floated in 2017 and had a remarkable first days trading. Closing at 190p, hopes were high for Quiz, although much of the £100m+ raised from the sale was used to pay off shareholders. The shares now trade under half of that, and perhaps have further to fall.
The warning was poorly times, at close to business on Friday afternoon. The narrative was close to the bottom and read:
The Board anticipates that, as a result of lower than expected sales through third-party online partners in the second quarter of the financial year, the performance of our UK stores and concessions during September and the provision against the outstanding House of Fraser debt, EBITDA for H1 2019 will be not less than £5.5m, being £1.5m lower than its previous expectations.
That is quite a large miss, considering that just a month before in the AGM Trading Update the board were ‘confident’ of delivering those expectations.
There was also a further cautionary note:
In addition, the Board has taken the prudent assumption that should the trend in online third-party sales continue during the second half of the financial year, Group revenue for the full year to 31 March 2019 would be lower than current market expectations at approximately £138m (FY 2018: £116.4m) and the Group’s EBITDA for FY 2019 would to be in the region of £11.5m.
Up until this warning, there was little to dislike about Quiz. Their growth has been prudent, the concession store model reduces risk, they are not in debt. The one sticking point for a lot of people was simply their valuation – they were priced at extremely high valuations in the hope that they would become the next ASOS or Boohoo. There did not seem a lot of room for error here.
Part of the business has been touched on in the warning. The use of concessions means that some factors are out of control. And it could well be that in a few years this concession model might not be as good for Quiz as it has been in previous years. I’d envisage that people like Debenhams and House of Fraser were quite desperate to do something with their excess space; it could be that in a few years they will be different.
The online growth is exciting here. Even in the warning, the growth of online for the last year is 44% (and this metric goes up to 70% when taking its own site into comparison). As a brand it has been well-accepted onto third party sites. A very impressive tie-up was with Next, who as we know have a huge market share.
Financially Quiz seem to be on a sound footing, if not having a huge warchest to spend. The float gave them £10.3m on the cashflow statement, almost all of which is still sitting around. As you could expect from a company in this position, there have been spends on inventory and also marketing.
There is a certain negative premium in the share price decrease for the opaque nature of the statement. The timing was poor, but the veracity of the statement has to come into question. A month ago, we were on track, yet one month later the figures are quite far apart. Either the company were not forthcoming at the AGM, or something has happened in the last month to give rise to this. Neither scenario is that palatable. Could one trust a similar ‘confident’ projection next time?
However, this shouldn’t get in the way of deciding whether to invest. Quiz had been a reasonable success story up to this point, and it shouldn’t go unnoticed that EBITDA of £11.5m at the reduced amount still represents growth from the past year. The fall-out from the House of Fraser debacle is rather immaterial and it does seem likely that this will be a viable way of expanding, together with the shops (where there are plenty of rental opportunities on the High Street).
The key problem with the share price is that it is all about the growth at present. If Quiz can’t deliver that, then obviously it is not worthy of its lofty ratings. A well-regarded player such as Next trades on around 12 times earnings, and there are others trading at even less, particularly the value brands. Fellow ladieswear retailer Bonmarche (who issued its own profit warning recently) is valued at 8 times.
So the key questions would be is the brand durable enough to maintain growth? Looking at their website, I am not particularly sure of this. They are not distinctive such as a Desigual, but neither are they totally generic. But their wares are keenly priced, so I can see the attraction. They also seem to have a good reputation and have a very wide target market in my opinion – not targeting youngsters or oldies but everything else in between.
Perhaps it is easier to focus on the more physical barriers: getting the goods to market. Sales via third-party websites are always likely to be volatile, as it is not always a level field. Temporarily a site like Next may choose to favour one brand over another (for example, commission incentives). Additionally I don’t see the power in the relationship favouring Quiz. If Next was forced to drop Quiz, it would not be a massive blow for Next, but Quiz would be harder hit.
Concessions should not be a problem: these would be quick to operate, albeit limited by the number of stores (it would only be suitable for department stores). Going it alone and opening their own stores would be a better solution and could be very successful, as well as continued development on logistics. But this requires the brand to continue to be viable, as if it goes out of fashion it could unravel quite quickly.
I quite like Quiz but from an investment point of view I don’t know enough to make much of a guess. If there is a prolonged price drop I may become interested, but at the current price I am firmly on the fence. 3/5.