Stockwatch: A near-8% yield offers support

Is £47 million retailer of women’s clothing Bonmarché (BON) evolving as a genuine turnaround or value trap?

An update for its financial year to end-March 2018 cites profit in line with expectations albeit “disappointing” like-for-like store sales down 4.5% that take the shine off 34.5% growth in online sales, such that total sales only edge up 0.5%.

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A mitigating factor is the 11.1% drop in store sales for Q4 (i.e. 13 weeks to end-March) hurt by a late blast of winter weather, which probably interrupted sales of spring clothing and kept shoppers at home.

7p-plus dividend is quite the crux for support

The update is also a bit vague in saying: “the company’s financial position remains sound” than declaring a year-end cash position; the significance being that while investors await better revenue growth, expected dividend growth towards 7.5p per share is key support and why the stock is edging up now.

The last declared cash position (at end-September 2017) was £16.1 million, up from £10.4 million like-for-like, versus a 7p per share dividend costing £3.5 million, so it’s reasonable to believe in a 7p base-level dividend growing so long as the commercial narrative evolves positively.

But if total sales continue to go nowhere, online offsetting weaker store sales, the board will probably just maintain the payout. So, when Bonmarché reports prelims on 19 June it will be interesting to see if the board delivers on expectations for slight dividend growth. The balance of probabilities implies so: the table showing cash flow strengths in the business, this aspect of dividend cover being higher than earnings.

Strictly, the latest announcement is a trading update, the audit is yet to complete, though it would demonstrate strong financial controls to have cited financial year-end cash. Not doing so can make sceptics feel there’s something to hide, i.e. if store sales growth is unrealistic and cash starts to ebb as the company “invests” in low prices besides new product, then Bonmarché becomes a classic value trap. I’m not saying this is what’s happening but is a worse-case scenario.

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After a long drop from 316p in late 2015 to 75p a year ago, this Fledgling stock has been volatile in a 75p to 136p range: last March (and its bad weather) enticing a drop from 100p, then April seeing a recovery from 80p to 95p.

I drew attention last June at 100p, saying that despite a strong balance sheet I’d wait for more evidence of marketing improvements and cost-cutting (see from the table how the operating margin fell from over 7% to 3%).

Then, last November, I turned more positive as interims showed a new chief executive improving the margin from 2.2% to 4.3%, online sales had jumped 38.6% and like-for-like store sales were up 1.6%.

With online as yet representing only about 10% of group sales, it’s therefore a concern how the trend in like-for-like store sales has turned negative again, recalling -4.3% in the 2016/17 year, despite online’s ramp-up from 2.2% growth then. But I wouldn’t ditch the turnaround rationale unless store sales continue to disappoint.

Bonmarche Holdings – financial summary           Consensus estimates year ended 31 Mar 2013 2014 2015 2016 2017 2018 2019                 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 13.5 15.7 Earnings per share growth (%)     -44.1 -18.3 -25.4 6.5 20.1 Price/earnings multiple (x)         7.9 7.0 6.1 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 (%)         7.5 7.6 7.9 Covered by earnings (x)     4.5 2.3 1.7 1.9 2.1 Net tangible assets per share (p)   21.5 48.6 58.1 58.1    

Source: Company REFS                         Past performance is not a guide to future performance

Relatively new chief executive shows initiatives

Helen Connelly has been in the role since August 2016, having previously been senior buying director for “George” at Asda, replacing Beth Butterwick who left after a profit warning.

Mind how Bonmarché is proving a challenge to drive growth, given Butterwick appeared satisfactory enough for Sun Capital Partners when they bought the business in January 2012, from the administrators of budget fashion retailer Peacock Group. They made a hefty profit when Bonmarché re-floated at 200p per share at end-2013, though it looks reduced overall given Sun’s 52.4% ongoing stake and the share price fall.

Thus, private equity has found it tricky to oversee the right boss and strategy, i.e. it’s a difficult business to judge. The table shows group revenues bumping along since the 2012/13 year, so if store sales can’t achieve a worthwhile positive trend, then it recalls a Warren Buffett adage: “When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, it’s the reputation of the business that remains intact.”

More positively, while the 50-plus women’s outer/sportswear market declined in 2017, Bonmarché continued to grow its share, so marketing flair can win through. It’s not a business to meet Buffett’s criterion of “moats” though, describing itself as “one of” the UK’s largest women’s value retailers.

Nor does the update add much grist on marketing except to say: “our focus will be on continuing to improve our proposition to customers through a number of self-help initiatives”, which repeats last January’s update offering hope of “profitable like-for-like sales growth in stores, and the continuation of strong sales growth online.”

The end-November interims offered more detail, citing “new ranges of a much higher quality and greater authenticity”, a new denim range achieving a 50% like-for-like sales rise, improved leisurewear, blouses and swimwear. Best not be swayed by highlights in the narrative though, it’s the net upshot for sales that counts, and, like investing in any turnaround, you need hope.

Lease expiries may also serve to help profits

Unlike most other retailers – especially Debenhams (DEB)  – Bonmarché is not lumbered with a lot of long leaseholds; various expire within one year and a majority within five years, which ought to be medium-term supportive of profits.

Management says adverse foreign exchange movements (affecting clothes’ buying/importing, in US dollars) have been largely mitigated via tight stock control, less discounting, better efficiencies, and reduced albeit more effective marketing spend.

So, in fairness, management comes across as doing a good job operationally, it may just need a bit more luck as regards consumer sentiment improving. A difficulty for investors, though, is guessing what extent of reported wage growth better than UK inflation, actually applies to women aged over 50.

Continuing bid interest, if speculative

A long-term bull scenario, that can still come together, is shareholders being compensated with a high yield until a turnaround tempts a bid that enables Sun Capital to divest, although I wouldn’t bank on it.

Bonmarché is a tricky situation that on various financial criteria is appealing to investors yet still needs to prove its marketing mettle. There’s a definite aspect of speculation and the sales narrative does need to improve; yet it’s possible the stock is in a volatile uptrend.

Overall, I’d countenance retaining it and buying on weakness, the outlook statement in June being the next crux for sentiment. Hold.

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