Special occasions retailer Quiz (LON:QUIZ) shares sank to an all-time low as another profit warning covering the first months of this year has led it to cut full-year forecasts for profits. The share price seemingly has not much room to much lower now:
2018 has been a disaster for quiz for many reasons. The underlying macroeconomic trends have not been good, with footfall down in shops. That being said it is a lazy excuse to blame this, as some clothes retailers are holding up fairly well, particularly those with good online offerings.
On a business level there are signs that Quiz is running out of steam. Profit warnings have been given last year, with a further cut in January after reporting poor Christmas trading. It seems almost incredible that just two months later, we are at the profit warning stage yet again, and the content of this one looks the most ominous.
The immediate future does not look good for Quiz. It trades via concessions in many stores, and booked a £0.4m loss on House of Fraser re-organisation. The recent Debenhams story looks far worse for Quiz as there is a real chance that either they may seek to renegotiate debts, or even worse cut their store estate massively, or not trade at all.
We would guess that most investors hearts would have slumped at the words ‘Trading Update’ this morning. It does not start on a good note:
During the Period, the uncertain consumer spending backdrop has remained challenging for QUIZ. As a result, the Group has recorded a significant shortfall in sales compared to the Board’s prior expectations. Furthermore, there has been a requirement to apply higher than anticipated discounts to clear excess stock.
Helpfully this is quantified:
QUIZ has continued to increase sales online during the Period with Group online revenue increasing by 16.2%. However, this growth has been offset by an 11.1% decrease in revenue from the Group’s UK standalone stores and concessions. Consequently, Group revenue for QUIZ decreased by 1.7% in the Period against the comparable period last year.
The online sales period being discussed is 1 Jan 19 to 28 Feb 19, so a 16.2% increase must be seen as a disappointment, as the growth rate was much larger earlier in the year.
A hammer blow for the predicted results:
The Group’s Christmas Trading Update on 11 January 2019 provided guidance for revenue and profits for FY 2019 which, at that time, reflected the most recent sales trends through our online, UK stores and concessions sales channels in addition to the impact of additional available retail space compared to the previous year. The Board previously anticipated that revenues for FY 2019 would be approximately £133.0m, which would have represented growth in sales in the final quarter of 9.2% compared to the previous year resulting in anticipated EBITDA* of £8.2m.
Given the significant shortfall in sales experienced in the final quarter of FY 2019 to date, and should this trend continue throughout March 2019, the Group anticipates revenues for FY 2019 to now be approximately £129.0m. It is also expected that the increased level of discounting will have a material impact on gross margins generated in the final quarter of FY 2019. The Board now anticipates that the Group’s EBITDA* will be approximately £4.5m for FY 2019.
Sales have been down, even at reduced prices, and in the space of two months, expected profit has declined rapidly.
A cautionary statement about cash:
The QUIZ balance sheet remains strong with net cash of £8.9m as at 5 March 2019. Inventory continues to be carefully managed with current stock levels similar to the previous year.
The previous comparative is not shown, but with the previous statement showing that net cash was £12.3m on 5 January, it is clear that £2.4m has gone in two months.
It could be wondered whether QUIZ might have crossed a line here where it might be difficult to return from. The business on flotation was a good one: selling occasion-ware and also goods seen on TV by fashionable programs such as TOWIE. There is no new research on Research Tree today, but an analyst note regarding the profit warning last year suggested that it could be entirely attributed to ‘erratic 3rd party demand’ (QUIZ sell their clothes on other websites as well as their own).
That kind of excuse will not wash today, and it appears that something more fundamental may be the problem. Perhaps the customer perception of QUIZ’s current line is not worth the money they are charging, hence the need for reductions.
Here is a snapshot of the interim results:
With underling EBITDA at £5.9m for the first half, we must see that the business has swung into a loss for the second half of the year, as the predicted result for the full year comes in below this.
So assuming no change in the trend, we can consider that without some drastic action, FY20 may be loss-making as well. With competition in the sector quite fierce, one of the few responses that QUIZ have is to cut prices to clear stock and either to hope for a better season this time around, and/or to reduce costs either by shrinking their store estate or finding other efficiencies.
That said, their financial position is not disastrous: they carry no debt, and only a small working capital deficit, although some of their receivables from Debenhams have to come under consideration of their credit-worthiness. They generated cash last year, with money going back to finance capex in new store openings and refurbishments. With the cash position as it is now, this may have to take a back seat, similar to how Revolution did. The core business needs to be revitalised.
Originally in the previous articles I was quite bullish about the case for QUIZ. But back then we were talking about EBITDA of £8.2m for a market cap of £31m, on a set of metrics that were bad, but showing improvements in online sales and on the international front.
Today both of these metrics are almost halved, and we seem to be showing a slowing in the rate of online growth, as well as the cash position dwindling to the point where all fronts cannot be fought without bringing the possibility of debt into the equation.
The speed of the decline suggests that a lot has gone wrong in a short space of time and the magnitude of it was not expected. A large swing in economic sentiment might result in a tidal wave that benefits all struggling retailers, but it is hard to see and event where this may happen.
Another case is the ownership of the company. The owners mostly sold out on the IPO, gaining something like £90m, as the company was much more valuable – the share price has declined by something like 90%. The family still own a huge slice of the company, outweighing the institutions.
Whilst the share is cheap, the failure of the company is rather staggering, and there may be a temptation for the owners to take this private again while the price is so low. With such a quick decline it may be unclear whether there is another agenda at play here, and such I wouldn’t invest even at this low price.