Interactive Investor

Stockwatch: Average into this value play

21st November 2017 09:29

Edmond Jackson from interactive investor


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Despite October being a tough month for UK clothing retail, Bonmarche  -  often seen as a black sheep - has declared it expects pre-tax profit for its full year to end-March 2018 in line with expectations.

Its interim results are good for a turnaround stock on a low rating - a price/earnings (PE) only of about 7 times, when multiples are normally much higher if the market is confident of recovery.

There's also a 7%-plus yield and net tangible assets per share of 45.8p. Investors broadly have little hope for Bonmarche, thus a narrative "in line" and without the stores worsening has pushed its stock up from 89p to 100p.

Interim pre-tax profit has recovered from £2 million to £4.2 million, like-for-like, on total revenue up 5% to £97.8 million.

Possibly Bonmarche is feeling the benefit of BHS's demise as a go-to destination for women aged over 50 -its core marketing target -although it also contends with J D Williams, one of the brands within N Brown Group.

New boss delivers genuine improvement

Online sales growth has soared 38.6% to £10.5 million, while store like-for-like sales rose 1.6% to £99.3 million.

Inclusive of net new openings, total revenue rose 5% to £97.8 million. This has improved on prelims last June when store like-for-like sales were down 4.3% and online sales up just 2.2% in a context of lower profits, earnings and cash flow.

The interim recovery does, however, affirm the dividend policy to maintain the total dividend at 7.14p in respect of the last financial year to 1 April 2017.

Bonmarche is a tricky stock, having been a perennial turnaround, and, just as new chief executive is getting the company's act together, it seems UK discretionary consumer spending is hitting inflation/wage constraints, possibly credit appetite too.

More positively, the company's positioning with a specialty customer focus and value offering means it does not have to struggle to differentiate itself in the mid-market, say like M&S. Consumer slowdown could herald a new element of customers to offset lower spending by those regular.

Last June, at about 100p, I remarked that despite a strong balance sheet I'd wait for more evidence of marketing improvements and cost-cutting (see the table showing a decline in operating margin to 3%) which in fairness the new boss is delivering.

Also an intriguing aspect is BM Holdings, related to private equity owners pre-flotation, with a 52.4% stake: this type of investor being transaction-oriented, thus likely to move on at some point.

Thus, Bonmarche is a bid target potentially, as soon as sustainable operational improvements are established; or if this stake was to end up (part) placed among institutions it would mark a watershed for progress, hence also likely push the price up.

Revamped marketing starts to pay off

With UK clothing sales challenged, the chief executive is prioritising market share with better products. "We are only at the beginning of the journey in some areas of our strategy and there is a strong plan to support future growth," said Helen Connolly.

Marketing has been refocused with much higher quality ranges and display fixtures, achieving a 50% increase in sales of a new denim range, also improved sales of leisure-wear, blouses and swimwear.

Peripheral sales such as a menswear experiment have been jettisoned to make better use of store space and drive sales density.

Opting for suppliers with shorter lead times has quickened the response to customer demands, a key strength of, such that for example Bonmarche's spring 2018 ranges were 50% ordered at end-September versus 80% last year, thus more flexibility to react to any change.

Online sales began to advance in the first three months of 2017, gathering pace in the current financial year from 1 April -helped by more efficient customer targeting and a new marketing agency, which have cut the cost of customer acquisition.

Free deliveries are now offered for orders over £35, also more delivery options. Various improvements have been made to the catalogues that regularly update, integrating them with the website for more seamless shopping between the stores and online, also a bonus loyalty scheme revamped.

Operating margin almost doubles to 4.3%

A persistent flaw is an operating margin so low that crippling losses would follow in a recession: likely a chief reason why the stock being priced for high yield, to compensate for this risk.

Quite why it has jumped in response to the results is, therefore, good progress on cost management via more selective discounting, despite weaker sterling raising the cost of imports and an overall increase in operating costs due to the minimum wage and three additional stores.

End-of-stock items are now cleared more effectively e.g. via the summer sale, such that they are now at their lowest level for five years. Altogether, the ratio of operating expenses to revenue fell from 55.1% to 53.5% and the interim operating margin has improved from 2.19% to 4.33%.

In line with this objective, seven marginal "stores" in garden centres and concession sites were closed during the period while five new stores opened - albeit three as locations of existing ones - thus overall store numbers are down by five.

Balance sheet can withstand a downturn

There is no debt, albeit £2.8 million liabilities in respect of derivatives for currency hedging on clothing imports, plus £1.2 million of other (unclarified) financial liabilities. There's no pension deficit.

Cash has risen sharply from £5.1 million to £14.9 million due to a range of improved variables such as the working capital mix. Furthermore, there is an undrawn £10 million bank facility which, combined, "puts the group in a strong position" without saying for what, if potentially an attractively-priced acquisition in the current climate besides store openings.

Tangible net assets per share have reduced from 58.1p to 45.8p over six months with intangibles up and property/plant down slightly.

Current assets are down 6% to £52.8 million due mainly to a lower derivative position, and current liabilities are up 7% to £44.3 million due to a £1.9 million derivative value. Note 16 to the accounts clarifies the hedging as sterling risk versus the US dollar (which tends to be the benchmark currency for clothing trade, even from Asia).

Bonmarche Holdings - financial summary       Consensus estimates 
year ended 1 Apr 2013 2014 2015 2016 2017 2018 2019
            13 months  
Turnover (£ million) 176 164 179 188 190    
IFRS3 pre-tax profit (£m) 12.1 8.0 12.4 9.6 5.8    
Normalised pre-tax profit (£m) -0.1 11.4 12.5 9.8 7.3 8.1 9.7
Operating margin (%) 0.7 7.1 7.0 4.5 3.0    
IFRS3 earnings/share (p) 19.1 22.0 19.8 15.7 9.1    
Normalised earnings/share (p)   35.0 19.8 16.2 12.1 12.9 15.5
Earnings per share growth (%)     -44.1 -18.3 -25.4 6.5 20.1
Price/earnings multiple (x)         8.3 7.8 6.5
Annual average historic P/E (x)   7.9 13.0 8.3 6.7    
Cash flow/share (p) 32.5 39.8 23.3 21.9 15.7    
Capex/share (p)   19.6 13.6 10.3 22.7    
Dividend per share (p)     4.4 7.1 7.1 7.2 7.5
Yield (%)         7.1 7.2 7.5
Covered by earnings (x)     4.5 2.3 1.7 1.8 2.1
Net tangible assets per share (p)   21.5 48.6 58.1 58.1    
Source: Company REFS              

Risk/reward favours long-term upside

Altogether, these results merit attention from a new boss delivering turnaround after a year in the role.

Bonmarche's market positioning with a selective clientele implies further to go, the chief risk being whether a UK consumer downturn compromises forecasts.

The next scheduled announcement is a post-Christmas sales update on 19 January, but obviously if profits are reckoned down by 10% or more at any point then a warning will ensue.

However, forecasts are undemanding unless a recession ensues, and the stock has twice rebounded from sub-90p (like in June), which looks like a chart bottom forming, versus better company fundamentals.

Timing is tricky given the consumer context, but according to the operations and a long-term view, Bonmarche offers value to average in to. Accumulate.

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