Joules: A great British brand growing fast

by Graeme Evans from interactive investor |

With a reputation for quality and a well-honed business model, Joules has serious long-term potential.

To the envy of larger high street players, AIM-listed Joules (LSE:JOUL) is continuing to show investors and the rest of the industry what's possible in retail with the right business model.

The success of the 30-year-old brand has been built around its canny positioning of stores close to its target market, as well as a fast-growing and flexible e-commerce operation that's been primed to keep pace with rapidly changing consumer trends.

Its multi-channel approach, which also includes wholesale, licensing and international growth, is reflected in a strong performance over the past financial year, with revenues up 17% to £218 million and profits set to be near the top end of analyst forecasts at around £15.3 million.

Shares jumped 6% to 270p following today's trading update, although analysts at Liberum and Peel Hunt think there's longer term potential to reach at least 400p. This compares with the 160p IPO price in May 2016 and the record high for Joules shares of 378p seen last April.

Source: TradingView Past performance is not a guide to future performance

Joules was one of the few retailers to emerge with their reputations enhanced in the run-up to last Christmas, with e-commerce doing particularly well. Online now accounts for more than half of retail sales, with a resulting knock-on benefit for the operating margin. International business is also making headway and now represents 16% of all sales, thanks to strong growth in the target markets of the United States and Germany.

In the UK, Joules has avoided the high street struggles of many other retailers by having more of its store portfolio in desirable locations such as coastal towns, from where it can tap the middle-class summer holiday crowd in what the company dubs its "coastal Christmas". Products are also available at rural shows and events.

While not necessarily focused on opening lots more stores - Joules currently has 124 outlets in the UK and Ireland and a wholesale business with over 2,000 stockists — the company is more focused on being clever about where it operates.

It's no different to the success of Greggs (LSE:GRG) or WH Smith (LSE:SMWH), who have positioned more of their stores in places of high footfall. Contrast this with the difficulties at Marks & Spencer, which is hamstrung by a legacy store estate featuring shops in increasingly poor locations.

Lee Wild, interactive investor's head of equity strategy, comments:
I met the management team at Joules earlier this year. I was impressed. Key takeaways were their sensible approach to the store portfolio; carefully picking new sites in affluent seaside towns and the like. A great website, success partnering with big chains in the US and reputation for quality clearly resonate with consumers. Licensing the brand for third-party products should also remain highly lucrative. There will be a new CEO by the end of the year, although succession risk looks to have been handled well. Colin Porter has done a great job, but will hand over to Asda's commercial director Nick Jones, the highly-respected former M&S man who now runs the George clothing brand. The shares are not particularly cheap, but the valuation is easily justified by predicted strong growth. Strong free cash flow should also give the skinny dividend a much-needed boost in a few years’ time.

Other factors in favour of Joules include its strong British brand and popularity with environmentally-conscious consumers who want clothes that last. Licensing the brand is another obvious growth area, having previously struck a deal for sofa retailer DFS (LSE:DFS) to sell a line of Joules furniture.

Liberum analyst Wayne Brown said the pipeline of available opportunities for Joules in the UK remained encouraging, with international increasingly a key growth channel.

He added: "Joules is adapting its model to the digital age. Not just through the channels it retails but flexing its supply chain so it can provide greater frequency of newness.

"This is all being done while accepting that consumers are being more demanding and costs are rising. Embracing the opportunity provides for enhanced profit growth, margin expansion and rising cash flow — a rare mix in the UK retail landscape."

He said a 2019 price/earnings (PE) multiple of 19 times for a three-year forecast annual compound growth rate in earnings per share of 15% was not demanding.

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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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