Shares in Joules Group (LON:JOUL) slumped 30% in early trading as the upmarket clothes retailer announced that a stock error led to lower than expected sales. The share price has since recovered some of its losses:
This has not been a great day for clothing retail, as Superdry also issued its own profit warning regarding Christmas sales. Superdry has had a torrid year and given out several profit warnings. Joules sits in a different market segment to Superdry, and targets the ‘premium British lifestyle’.
Joules has been a relatively new listing, only coming to the market in 2016. Since then it has enjoyed a huge rise, getting to 387p in the summer of 2018. Since then it rapidly fell in the falls of 2018, but never regained its highs. Todays drop puts it close to the all-time lows.
What’s gone wrong at Joules Group?
The bad news comes in a Trading Update this morning:
However, retail sales¹ over the seven-week period as a whole were significantly behind expectations and decreased by 4.5% against the prior year (FY19 comparative period: +11.7%). This was a result of disappointing online sales performance due to an internally generated stock availability issue through the important end of season sale event, the cause of which has now been addressed. Encouragingly, traffic to the Group’s website grew by 8%, however conversion was significantly down due to the stock availability issue.
This is refreshingly honest, there are plenty of factors which could have been blamed for profit warnings. However, the swing of the retail sales is significant: this is the largest segment by far, accounting for £159m of the £218m of turnover seen last year.
We have some remedial actions, which will incur non-specified one-off costs which are bound to hit profits, which is summed up as:
Taking the above into account, the Board anticipates that FY20 Underlying PBT² will be significantly below market expectations³.
Helpfully that expectation is defined in a footnote, which is £16.7m. A broker note (available on Research Tree) has already given updated forecasts and profit before tax goes from £16.0m to £10.1m: a huge miss.
Joules Group: Growing Pains
Joules has shown a similar trajectory to many other retail chains since flotation. IPO proceeds were used to pay of indebtedness, leading to a net cash position. The growth in turnover has been impressive, and this has been matched by profit indicating some good pricing power:
Indeed a look at its website shows that this is not the type of retailer that is going to get involved in discount sales unlike many other brands. Neither has it gone down the route of having a huge amount of money tied up in inventories: Ted Baker had £225m, Superdry had almost £190m, the figure is £35m which is smaller even factoring in turnover.
The broker note (available on Research Tree) gives more detail to the stock error, citing a miscalculation which led to stock being diverted into stores leaving website demand unfulfilled. The profit impact is given as £3.5m, so this seems like a colossal error.
Still, this may look to be a ‘good’ profit warning, in that the company had been unable to fill demand and it certainly beats the opposite alternative (no demand for products). This is not an automatic signal to buy, but Creightons (LON:CRL) had a similar issue and has gone from strength to strength after fixing it; but on the flip side Moss Bros had stock issues and are still struggling, going by their share price.
Joules Group: Stability
We should not compare Joules to Moss, though. It can be said the group are very cash generative which is not particularly surprising as most of their customers pay up-front for their goods:
All their growth has been organic as well, which leads to a good balance sheet. Net tangible asset values are positive, and there seems to be no liquidity issues with their current liabilities well covered. Group borrowings show plenty of headroom (£10.6m drawn vs £25m available).
Their KPI’s are moving in the right direction:
It is reassuring to see the online sales and international sales jump, as these can act as buffers against the UK bricks and mortar retail space which is suffering grim times at the moment. Reduced footfall and increasing costs being factors which are difficult to avoid.
Some bear factors are that levels of capital expenditure are high, and have almost matched all the level of cashflow generated. This has resulted in only a very small, token dividend payout:
Large capital expenditures are perhaps to be expected. But Card Factory (covered yesterday) has a smaller capex expense and a store estate of 1,000 stores. A look on the annual report shows that a large amount of development spend is being capitalised in respect of IT systems.
Another factor is remuneration: both founder, CEO and CFO took home over (or near to) £1m each in the last report, with total director pay of £3.3m: a large chunk of profits. The business is also spending £14m over the next 18 months to develop its Head Office, which added to a current near £6m spend on site acquisition sounds a bit unnecessary for Joules size (although they may argue differently due to their brand positioning). These items may lead some investors to wonder who the company is being run for.
Are Joules shares good value?
At the 160p low this morning I would have said the share price was accurate enough for those happy to wait a while. Perhaps as a result of its performance so far, Joules shares have been expensive for the most part, leading to earnings multiples of close to 20: high for the sector.
One may be inclined to ask whether a purchase of these shares may be good value as opposed to Next, which has traded at lower multiples and features a greater diversified set of income streams and the financial clout to ride out storms.
As we have see in clothes retail and specifically Ted Baker, there are plenty of sources of profit warnings which can cause big effects on profit. Some things as simple as misjudging the season could be fatal, as cashflow then puts huge pressure on the company (as seen in Bonmarche or Quiz). Joules are protected from this to an extent as they are not limited to clothes.
On balance, while Joules have gotten most things right so far before this blip I don’t see why they should be priced at a premium to Next. The brokers note also downgrades profits as far out as 2022, which does not make sense if the inventory issues are a quick fix. My own opinion is that the price is around the right region. 3/5.