High-yielding Bonmarche shares still cheap

A couple of months ago, we took a closer look at women's clothing chain Bonmarche Holdings and asked whether this 8% yielder represented a genuine turnaround story or just another of those dreaded value traps.

Today we got our answer when Bonmarche shrugged off problems elsewhere on the high street to paint a surprisingly upbeat picture. Full-year profits were up 27% to £8 million, while the all-important dividend rose by 8.5% to produce a total pay-out for the year of 7.75p.

That increase in the dividend is hugely significant for investor sentiment, given that the City had been expecting no change on a year earlier. With current trading also stronger than at the end of the last financial year, shares raced ahead by more than 12% to their highest level since the start of 2018.

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With a price target of 150p, Investec Securities thinks shares still look cheap given the company is trading on a projected 2019 price earnings (PE) multiple of 6.4.

Analyst Kate Calvert highlights the company’s balance sheet strength and reckons that profits can grow to £9 million this year:

"A more agile business model is emerging, and we believe there is more to come with multiple self-help growth levers."

She pointed to opportunities in terms of developing the product, as well as the online and loyalty card offer and in delivering supply chain efficiencies.

Source: interactive investor      Past performance is not a guide to future performance

Online sales growth of 34% was the stand-out performer from today's results, with momentum remaining strong in the fourth quarter despite tougher comparatives. Online now accounts for just under 10% of total sales and has been important in offsetting much weaker trading for the stores estate.

Under the leadership of Helen Connolly, who became chief executive in August 2016, Bonmarche has also benefited from a better-than-expected gross margin following tighter controls on discounting.

Cost controls have also resulted in an improved underlying margin rising by 80 basis points to 4.4%. Contrast that with the margin performance at Debenhams, where shares fell another 8% today after its third profits warning in a year.

Bonmarche's value offer is particularly well placed, given the expected increase in the population of its target market of women aged over 50. It also benefits from an established loyalty scheme known as ‘Bonus Club’, which has 7.2 million members, 1.7 million of whom are "active" members.

As Connolly said today:

"We have a clear strategy in place to continue to improve our proposition, which we expect to do during FY19 and beyond."

The higher dividend is a sign of her confidence in that strategy, as well as in continued strong levels of cash generation. The business is also debt free.

After a long drop from 316p in late 2015 to 75p a year ago, Bonmarche shares have been in a 75p to 136p range since then.

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.