Bonmarche (LON:BON) Issues Another Profit Warning: Shares Fall 45%

By | 13th December 2018

Embattled womens clothing retailer Bonmarche Holdings (LON:BON) today issued another profit warning – its second in the space of two months, warning of a further deterioration on profit due to slow sales. This was covered by this site in October, and whilst the share price reaction was relatively standard then, on opening this showed a huge fall. The company value dropped by almost 50%, although this has since recovered a tad:

As with many profit warnings, this does not show the bigger picture. The share price has oscillated between 80p and 140p this year, although today’s large cut has sent the market cap crashing by half in the space of a few months. At its lowest point trading today the business was worth just £20m – a remarkable valuation considering this is (or potentially was?) a profit making, dividend paying, debt-free business with approaching £200m in sales. Effectively a failure is being priced in sometime in the future.

The Warning

Perhaps the reaction could be better understood with the warning itself, which would have been massively disappointing for investors. A forecast was made in the interim results on 20 Nov, but this looks to be missed:

The forecast assumed that demand would broadly follow the pattern experienced last year when, during the earlier part of November, customers delayed purchases in anticipation of being able to take advantage of Black Friday discounts. However, sales during the Black Friday week (ending 24 November 2018) were extremely poor, particularly in the retail stores, suggesting that consumer behaviour is not following last year’s pattern, nor the pattern of any year we have experienced previously. Further, sales have not recovered since Black Friday, despite the application of extensive discounts. Consequently, we have concluded that sales will not recover to normal levels in the short term, and that it is appropriate to make a further revision to the forecast.

Rather curiously, they also go on to blame Brexit:

We believe that uncertainty surrounding Brexit is a significant factor affecting demand and, therefore, that it may not strengthen until the current period of heightened uncertainty ends. As we have no visibility of when matters will be resolved, we have taken what we believe to be a cautious approach to our forecast and assumed that sales will not show any significant improvement before the end of March 2019. Accordingly, and partly to reflect the high degree of uncertainty inherent in the forecast, we now estimate that underlying PBT will be in the range of breakeven to a loss of £4.0m for the current financial year. The mid-point of this range corresponds to a store LFL sales assumption for Q3 of approximately negative 12%, and approximately negative 1% for Q4, against a particularly weak comparative last year of negative 11%.

There was no good news for income seekers either, as the dividend sounds likely to be pulled if there is not a recovery:

The Board’s intention is to maintain a progressive dividend policy, but it will review its stance in relation to the final dividend for FY19 when there is greater clarity about the full year’s result, and the outlook for the clothing market during FY20.

The Business

Bonmarche are a success story of sorts. They retail ladies clothing, aimed towards the more mature end of the market and are a well-established brand, operating out of over 300 stores across the UK. They floated in 2014, although like a lot of more recent IPOs the performance of the shares have been a bitter disappointment, failing to gain the growth anticipated. After reaching a peak of over 300p three years ago, it’s been almost downhill ever since for the share price. Today’s price marks an all-time low.

It is fair to say that physical retail of clothes is one of the most untrusted market segments out there, and is not simply limited to the market Bonmarche and aiming at. In recent months we have also seen Quiz, Superdry (twice), and Footasylum post profit warnings. Some of the reasons are macroeconomic, as many retail stores are facing increased headwinds in the forms of rising wages for workers and decreased disposable incomes. Some are more structural, in that customer tastes are changing not just in the way we shop but also the types of goods demanded.

For clothes retailers, improved logistics within the last decade has meant buying clothes is not the hassle it used to be. Back then, it meant waiting several days for an item to show, and having to pay for a return, taking it to the post office to get it tracked and again having to wait for it to be processed. Nowadays, next-day delivery is the norm, and returning items is as easy as taking it to a drop-off point. Fashion styles move quicker and are lower-priced on average, as the success stories of companies such as ASOS and Boohoo show. And at the bottom end of the market, stores such as Primark have upped their game in terms of quality.

There are no real other insights to be gained from todays RNS. There is a cautionary note on cash:

The Group’s cash reserves are expected to be adequate to meet its liquidity requirements even at the lowest end of the PBT range, during the period when the cash balance is lowest, around the end of March.

Cash at the interims had decreased to £9.6m from £14.8m at H1 FY18. With more capex costs weighted to the second half of the year this may be interesting to see what the situation is at the end of March.

The average lease remaining here is not long: 3.6 years, although taking the current trading conditions into account, it could be debatable if all of the leases could be seen out.

More worryingly was the future forecasts: underlying PBT will range from breakeven to a loss of £4.0m. That is a massive swing from the previous forecast (£5.5m) and the previous year (£8.0m), and illustrates a stark truth: things can go wrong very quickly in this sector, and once they do it might take quite a long time to figure out. This is underscored by the helpful like-for-like figures – a midpoint of this range suggesting a 12% drop. Given all other expenses will stay approximately the same, those are not good prospects.

Dividends show on the accounts as:

That’s a 10%+yield on current prices, but it is difficult to see the justification for this being retained.

Comment

There seems to be a penalty for credibility of statements. In the past profit warning, the CEO noted that the previous years results would have been matched but for a currency impairment. The currency movement has not been favourable for them since, because the pound has got even weaker, effectively increasing the costs of purchasing items.

A lot of people would have taken a dim view of blaming items such as Black Friday and Brexit. For the target market, would Brexit have much bearing on whether to purchase a piece of clothing? And if so, why are retailers such as Sosandar not reporting similar effects (in fact, reporting a massive increase in sales)? It sounds like avoiding some of the core issues, which is the competitiveness of the offering.

As we saw with Superdry, it is one thing to identify the source of the problem, but it is another to fix it. Superdry concluded they had too much exposure to warm clothing, but change takes time: up to 18 months. By contrast, it is unclear what Bonmarche are planning to change, apart from simply wait and hope that consumer spending habits change after Brexit. Whilst the CEO may be hopeful of some recovery in FY20, with other competitors moving forward it seems they might continue to struggle with pure online plays.

 

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