The Brand Architekts share price (LON:BAR) fell almost a quarter today as the company revealed in its half year results that profits would fail to meet expectations. The fall was a slow burner, but the markets have plenty to think about at this moment in time:
Whilst Brand Architekts name will annoy spell-checkers and the traditionalists, they are not a new company. They have simply had a name change, and were formerly known as Swallowfield. The business has seen a very large change in a short period of time and have rebranded as they see fit.
Although listed since 2006, Swallowfield have remained a pretty small business, specialising in the design, manufacture and supply of personal care and beauty products. Operations were run conservatively and profitably. There is more than a passing co-incidence here to another company, Creightons (CRL).
This changed in 2016 when then Swallowfield raised £8.6m to buy a company called the Brand Architekts, which owned a stable of more premium health and beauty brands. The previously stable Brand Architekts share price spiked on this, going over 200p on improved prospects. We can clearly see that the transformation has become full circle as the company has now assumed the Architekts’ name.
What’s gone wrong at Brand Architekts?
The bad news comes in the half-year report. This doesn’t make easy or nice reading. Revenues and profits have fallen, caused by declining UK and international sales.
Obviously, coronavirus is the key word at the moment, and there was good news on this front:
The company sources most of its Christmas gift ranges and some beauty accessories from China. The majority of this volume is produced from June to August and shipped in September/October. We are in close contact with our Chinese suppliers to understand the level of supply risk and possible mitigation options related to the current Coronavirus outbreak. At this point we expect to be able to source all required goods, however, we continue to review the situation closely due to the growing uncertainty.
Not so good was the outlook:
Over the last calendar year the business has had to deal with a number of internal and external challenges. Whilst this has had an impact on trading performance and, notwithstanding continued economic and consumer uncertainty, we do believe the business is now well positioned to move back towards a growth phase. We expect the second half to be challenging but to be broadly in line with the revenue generated in the comparative period last year and for that improved momentum to build into the next financial year.
The internal challenges must refer to the departure of the CEO. A new one is being lined up but will not join until May. Further bad news came, but lacked numbers:
In addition, given the level of competitive pricing and promotional pressure experienced in the market, the Board anticipates that the Group’s operating profit will be impacted resulting in a significant decrease to previous market expectations.
However, a new research note came out today on Research Tree. This estimates adjusted PBT to reduce to £1.0m – a 34% drop.
Brand Architekts: All change
The sale of the manufacturing division changed the business fundamentally. A clip from the annual report shows this was most of the business in terms of revenue:
We don’t need a calculator to figure that manufacturing is a low margin business, and brands is a high one. The previous report did not provide a detailed geographical breakdown (aside from EU/Rest of the World). The sale also has knocked off over £13m of receivables from the accounts -a material figure considering turnover. It could be the case that the focus of the company was desired to be in designing brands, not chasing payments.
So what is left? A browse of their website shows the Brand Architekts to be pretty much the same as when they were acquired. They own a range of mid range brands – not totally premium and not basic either. There also appears to be acquisitions bolted on as well as new brands developed. The mens grooming brand ‘Fish’ was acquired in 2018 and is semi-recognisable.
These are exciting times for the industry. The concentration and number of retail outlets means that a firm can scale up pretty quickly if a good product is found. Innovaderma and their ‘Skinny Tan’ line now retail in Boots and Superdrug, making them accessible to most of the public. An increasing trend is also a direct model. People are increasingly buying their health and beauty products on Amazon, or alternatively direct from the brand website.
Brand Architekts: Balance Sheet
The move to sell the manufacturing side also transformed the company’s finances. The total consideration of £35m was larger than the current market cap today. This doesn’t all flow to cash as the business had to settle debt, and the exceptional costs related to the disposal.
The half-year results provide us with the latest detail. The company is now sitting on £20m of cash. There are still some remnants of debt of approximately £2.5m. There is also a large pension deficit. This was measured at £9.5m and has come down to £6.6m, but the discount rate has changed from 2.0% to 3.05%. I am not entirely sure what has changed in this year regarding this, but the deficit represents a real obligation that is currently costing £0.3m to service. On the reduced profit figures this is quite material. And curiously, the sale of the manufacturing side did not appear to change the pension deficit: perhaps a term of the deal.
Despite this, the sale of the manufacturing side gives the business a great cushion at the moment, and like the annual report says there is room for acquisitions. It seems that the new CEO will come in with a clean slate. There seems no immediate danger.
It should be said the balance sheet will become much weaker in future. The sale offloaded much of the tangible assets on the balance sheet, namely freehold land and plant and machinery.
Is the Brand Architekts share price good value?
Deep value investors may be interested here, as the cash held in the company seems to rate the business at a very low, perhaps non-existent multiple. It is also the case that the recent slowdown has seen all share prices affects, BAR is no exception and is cheaper today than last month, even before today’s profit warning.
However, investors may have reasons to be unhappy with this. The old CEO lasted around a year, and the company are still searching for a CFO. At the moment the ship appears rudderless, and it has done so for some time.
The seeds of this profit warning perhaps began in the AGM statement last year which cited difficult conditions. Maybe this is not exclusive, as other brands such as the earlier mentioned Skinny Tan are creating large growth.
A cursory look at Brand Architekts’ portfolio shows many ‘OK’ brands which may not carry much of a premium if we consider the type of things that Creightons is manufacturing for the basement retailers. Many of these seem quite vulnerable to price competition. It may be the case that once momentum is lost it is difficult to regain. Warpaint issued a profit warning back in 2018 and its share price has not recovered.
Another worry is that the loss of manufacturing facility make give rise to a lack of flexibility. For instance, the coronavirus may mean that any type of anti-bacterial soap may be good but speed to market could be too slow.
On the flip side the cash balance may provide some downside protection to the Brand Architekts share price. But I suspect the market may have called this right and priced the brands at very little. Perhaps biased by Creightons (in which I currently have a long position) I fear a slow decline here unless successful brands can be developed. 2/5.