Gift card and incentive retailer Park Group (LON:PARK) today slipped to a profit warning as new accounting regulations mean revenues are deferred. Considering that this may only be a simple case of recognition in a different period, the market has reacted strongly to this and the shares were down 11%:
We can note that this is not the first warning that Park have put out – there was another mild, slightly below expectations warning almost exactly a year ago to this date, and even the trading update 2 years ago featured a similar warning. This has put the downers on the share price, which hasn’t really gone anywhere for some years, although it is still priced way above what it was 10 years ago.
Park are perhaps one of the companies that aren’t as visible as their brands: they operate gift vouchers schemes for merchants including the multi-retail ‘Love2Shop’ brand as well as the long-standing Christmas stamps saving scheme. These have a fairly broad reach, with Park pairing up with not only businesses, but also employers and clubs who can use the cards to operative incentive schemes.
The type of business is here is not going to deliver any growth, but seems to have been well run. It is a consistently high scorer in the Stockopedia ranks and currently holds a ranking of 81.
This comes in a Trading Statement RNS. We start off well, as trading is ahead of expectations. We come to the kicker:
However, the particularly strong growth in our more profitable card business means that the financial impact of the new accounting standard IFRS15 is now expected to be approximately £0.5m higher than previously anticipated, as a greater proportion of profit will be deferred until the current year.
In the absence of anything else, this will feed down to the results:
Accordingly, despite the strong underlying trading performance, reported PBT (before exceptional items) is expected to be marginally below market expectations*.
Perhaps they also considered this a day to bury other bad news:
Having taken the decision to move to new offices, we anticipate incurring an exceptional impairment charge of approximately £1.25m on the carrying value of our existing site.
Helpfully it should be noted that Park actually include a reference to what these expectations are, in this case revenue of £112m, and £12.9m profit before tax.
The first thing that we might need to know is what these accounting changes actually mean. This has been covered in the past financial statements and therefore is not a surprise:
This is bad news for Park, as it shifts the revenue recognition to when a customer spends. Selling a card gives a concrete date and amount for which to input into the accounts but under the new accounting standards it will be unpredictable to know when a customer will spend, and hence visibility might decline a little. In extreme cases, a customer might not spend a voucher at all (in the cases of lost/stolen), and in fact a provision of some £48m sits on the balance sheet in respect of unredeemed vouchers.
In addition, stores running into difficulties may also refuse to accept vouchers, therefore meaning this revenue can never be recognised under the rules. The overall impact is unclear to me, as it may be difficult for Park to reimburse the end users of the product as many of the cards are used in lieu of payment for other things such as staff incentives.
In terms of business, Park are heavily H2 weighed as many of their goods are seasonal – the Christmas saving scheme being an obvious one, but many other vouchers are given as gifts throughout the year. Perhaps it is this factor that leads to the April updates always being bearish, but the company has grown profits and dividends consistently over the past years, which is an encouraging sign. The company has no debt and the cash pile grew to £40m at the time of the last annual report. As one may expect from this type of company, capital expenditures are low and mainly represent investments into technology.
This being said, perhaps the cash pile is not all it seems as the company carries a lot of liabilities – the main one being trade payables, but a substantial £48m in provisions in respect of the unspent balances on cards. Provisions are future liabilities that may or may not occur, and whilst it seems unlikely that this would unwind in one go, fulfilling the provisions will require real cash. With only a small amount set aside for intangibles the net asset position is fairly small, and looks set to decrease even further with the £1.25m impairment charge onto assets.
But then again, perhaps it does not need to be? This seems like a business that is supported by the retailers it offers gift cards for. Customers pay up front for the cards, but Park do not pass this onto the retailers until the money has been spent. This gives rise to the large balances in both assets and liabilities. Most of the customer deposits are actually separated in a trust account to give extra protection, but the interest on this account makes up a part of the profits.
This business definitely will elicit different responses depending how you view the sector. The bear case is rather obvious, growth has been anaemic here for some years and it is difficult to see where more growth can come from as arguably this sector is already saturated. Park have shifted into some new products that utilise online, but gaining traction in different countries seems quite difficult or impossible. Expansion by acquisition also seems difficult assuming the valuation of an equivalent company is similar. Additionally it does feel like the whole sector is ripe for some type of disruption by cloud-based technology which also would solve the problem of unredeemed lost vouchers.
It is also fair to say that this type of business will never run away in terms of share price. Even if it recovers from this warning I do not see the upside as that large because of the growth prospect.
The bull case says that Park have been making hay for some years, and the most recent margins of almost 10% show that as long as they keep on hammering away on both ends – recruiting businesses and selling vouchers for them, there is a good return for shareholders. It is a mature business and it appears there will be few shocks that require the business to spend a lot of cash. With a bit of positioning, the Christmas product is a counter-cyclical model, with users increasing during leaner times, although reduced High Street spending may balance this out. For whatever reason, it has not been challenged so far, perhaps because the niche is being perceived as not worthwhile. But selling a £50 card for £5 profit seems a good deal if you can do it enough times.
The most clear growth opportunities could result from overseas and other pre-paid cards. A truly international, multi-currency reward card would really be something and if they could work a platform that delivers it for companies this could be a really valuable product.
At the moment I feel inclined to think that traditional reward cards will be around for some time and the management will successfully manage to migrate it all online. 4/5.