Shares in Laura Ashley Holdings (LON:ALY) today dropped to a new all-time low as a fresh profit warning spooked investors. The damage has been done here over a number of years. Today’s warning might have had a fearsome impact on others, but the effect here was relatively benign. That will of no consolation to holders, the vast majority of whom may be nursing large losses at present:
In some ways, the story of this particular share has been entertaining and tragic at the same time. Once the poster-child for Britishness, Laura Ashley products enjoyed huge success in the higher-end home categories. In 1996 its share price came close to 200p. Since then, it has been decimated by the competition and has been marginalised. By 1999 the share price had already declined to 30p and for the next two decades it would be suppressed at these levels or lower.
Most other businesses might have given up the ghost at this stage but Laura Ashley has shown remarkable longevity, and investors hopes have been raised many times about a turnaround as the business went through tough times. In more recent years, the British aspect has been preserved and mainly marketed overseas under a franchise model which has seen some success, while the newer Malaysian ownership decided to blow out large amounts of money on an office in Singapore, financed by debt, which enraged investors. The business still goes on, though and is clearly in demand as it rebuffed a takeover bid earlier in the year.
A slightly late RNS at 10.30am gave probably the shortest and most clear warning we have seen yet:
Trading conditions have been very demanding over the third quarter. The Board of the Company have reviewed the revised full year forecasts for the year ending 30 June 2019 and expect the results to be significantly below market expectations.
That was the sum of it. No figures to help us out, only the word ‘significantly’. Which can only be read as a bad thing.
The first question may be whether there will be an actual profit this year. The answer seems to be no. The interim results in February already contained a profit warning and gave PBT as £0.0m. If we view Stockopedia, this seems to have taken a big dive off a cliff:
This is quite an alarming drop, and the share price indicates that the future of the business may not be that straightforward. There is no cash in the business, and previous borrowings were asset-backed. Whilst the company should access finance, they may be in a tough situation if things get worse.
One of the first questions to ask is to whether the issues are temporary or structural. It is very easy to feel that the latter is in play here. Looking at the Laura Ashley website, there is much competition for it and macro factors do not look attractive.
Laura Ashley have sought to counter this by becoming more of a ‘lifestyle’ brand – they are opening tea rooms in Asia (perhaps where the brand appeal is strongest) and are seeking to licence their name for franchise stores and hotels. The focus is very much on Asia and the company are at pains to point this out.
But it seems that this change cannot come quickly enough. The group still operates 156 stores across the UK, which are difficult to convert to lifestyle products and are more or less fixed into being smaller furniture stores. The contributions rather helpfully define it:
The website generates almost double the contributions despite only being a small part of the business. Also not in this picture is the contribution driven by non-retail such as franchising and licencing – these activities generate almost the same as the store estate.
Downsizing may not be that cheap or easy. From the annual report, here are the lease commitments:
Most of this £75.8m will comprise rental payments, and given the absence of any profits at the moment, this might be a struggle and with this in account this turns the asset position negative.
The cashflow statement is not pretty at the moment. It is clear that the company is unwinding the retail operations somewhat, with inventories and payables decreasing. On a loss from profit from operations this puts additional pressure on the cash position.
The absurdly short RNS probably comes as no surprise to holders, as there have been many twists and turns in the story so far. The truth does seem that with the office sale out of the way (a colossal deal relative to the size of the company) that the end game may be near: there is no debt, but there is no cash either. Stockopedia puts in a c.£5m loss for this year and with large lease commitments and declining retail sales there will be need to be some provisions for this to be met.
There is a lot of company for the money on offer here – the market capitalisation is under £20m. But the owners have shown no interest in cutting a deal.
The ways out look rather limited. 1999 saw a huge reorganisation and money raised through a rights issue, which seems hard to push through now. Another option would be a CVA which would allow some renegotiation of its difficulties. A most unlikely one would be Mike Ashley, who seems intent on buying every High Street retailer that has come into difficulties, and to be fair there may be some decent upsides to this considering his ownership of House of Fraser, for which Laura Ashley is a rather good fit.
The bear case seems to be that there is more value in the Laura Ashley brand than the market is giving credit for. I do believe it is the case that the Asian markets perhaps regard the brand a little better than it is in the UK, but translated into local currency it would be a hard sell to shift any of their fashion or furnishings. So the move to other activities such as tea-rooms and licensed hotels makes some sense, although this requires more investment to keep the brand fresh – money the company does not have.
Gut feeling says that they are doomed, which is a shame as a few years ago things could have gone either way. 1/5.