Quiz (LON:QUIZ) shares sank by another 30% today as it updated the market on its Christmas sales. This has been an extremely poor period for Quiz as it’s last profit warning was back in October, which we wrote about here. Back then, the share price to 93p, a drop of 36.72%. Today another similar fall took place:
It’s remarkable how the market has fallen out of love with the share so soon after IPO. Let us not forget that it traded at 190p back then, so the share is quickly approaching 10% of the value then.
The share price destruction can easily be attributed to factors at the company – which had ambitious growth forecasts which it failed to fulfil (although the company is still growing), and a poor year for retailers: Bonmarche, Superdry, have both warned on profits twice, and even online leader ASOS warned about growth. Perhaps a very similar case to Quiz was seen in Footasylum – a relatively new float targeting growth – had run into similar problems as we have seen at Quiz which has caused a reduction in profits.
The warning comes in an RNS helpfully detailing the Christmas period:
The Group had previously indicated that its financial results for the year to 31 March 2019 (“FY 2019”) would be largely dependent on trading during the key Christmas Period. As has been widely reported, the retail trading environment has been challenging over recent months, particularly in November. Whilst the Group’s sales patterns improved as the Christmas trading Period progressed, overall sales for the Period were below expectations.
We know what the implications for this are, and this is backed up with figures:
Consequently, the Board now anticipates that revenues for FY 2019 will be lower than current market expectations at approximately £133.0m (FY 2018: £116.4m).
There is also some knock on effects for profits as additional discounting has meant margins have shrunk a little:
As a result of these factors, the Board now anticipates that the Group’s EBITDA (excluding the previously announced write-off of £0.4m debt arising from the administration of House of Fraser) will be in the region of £8.2m for FY 2019.
Comparable figures for the past year from the annual report show that FY18 EBITDA was £11.5m, so we have a case of increased sales and reduced profits.
Much of what was written in the last review still applies – Quiz are a fairly conservative play in terms of business and clothing. However, it has become clear that these might be seen as weaknesses. The concession model which it has used to gain bigger presence in the market has suffered a little with the woes of Debenhams and House of Fraser – without them it is likely that Quiz would not be able to set up store quickly. With 71 operated stores, they face many of the problems that Bonmarche do because of their product – at the lower end of the market – they are sensitive to input costs rising on reduced demand.
As for all clothes retailers, the demand is based on the product offering. Other brands like Sosandar have chosen to segment themselves away from competition, but Quiz are perhaps at the sharp end of it, facing competition from many different angles.
One thing is that Quiz are not running out of cash. The latest update shows cash at £12.3m and no debt. This is marginally down on the last reported result (£12.5m). This sounds fine, but there are some lofty ambitions from the company – for example opening another 40-50 stores in the medium term, further international expansion. That comes at a cost and doing all that might be not possible on this type of budget.
It is remarkable how much the market has fallen out of love with Quiz, and what has got cheap has got even cheaper, the valuation of £31m today equates to less than the reduced EBITDA this year of £8.2m. It is almost as if the market is pricing in that sales will fall even further.
One thing that may make the market nervous is the weighting to stores. Some concessions are looking shaky – you couldn’t rule out Debenhams not existing in a few years, and making a commitment on stores requires the brand to remain relevant. This is not guaranteed in my view. With an immense amount of competition in the young adult segment, there will be winners and losers.
To be fair to Quiz they are doing things to arrest the slide. Sales on their website are up, they are also targeting international expansion which may offer some respite from the competitive marketplace in the UK. The difficulty is interpreting the data. It has gone wrong in a relatively short period of time for Quiz – is this due to the factors such as the World Cup, Brexit, the economy, or did they simply get consumer tastes wrong this season? If the latter, that can be rectified.
I feel they have been rather unfairly punished by the most recent share price drop. Their results have shown up to this point that there is a reasonable control on expenses, and there is still demand for their products (albeit not growing as rapidly as before). Whilst I do not think there will ever be a recovery to the position they were on IPO I don’t think the bear case is as pronounced as the share price makes out. Originally a 3/5, with the current price greatly reducing the downside, I would up this a point.