Bonmarche has now released its final results for the year ended 2016.

Revenue increased by £9.4M when compared to last year but cost of inventories were up £4.2M, operating lease payments increased by £693K and staff costs grew by £3.3M to give a gross profit £1.7M above that of 2015. Legal & professional fees of £1M were incurred, relating to the move to the main list, other admin cots were £2.2M higher and distribution costs increased by £937K which meant the operating profit fell by £2.9M. Finance costs were moderately down buy tax costs fell by £721K to give a profit for the year of £7.8M, a decline of £2.1M year on year.

Total assets increased by £4.1M when compared to last year, driven by a £1.9M growth in cash, a £1.7M increase in plant and equipment and an £817K growth in the value of the cash flow hedge, partially offset by a £499K decline in inventories. Total liabilities declined during the year as a £941K fall in rent-free deferred income, a £658K decline in current tax liabilities and a £528K fall in trade payables was partially offset by a £755K growth in accruals and deferred income. The end result was a net tangible asset level of £29M, a growth of £4.7M year on year.

Before movements in working capital, cash profits declined by £2.4M to £13.4M. There was a small cash outflow through working capital due to a fall in payables and after tax payments increased by £579K, the net cash from operations came in at £10.5M, a decline of £579K year in year. The group spent £4.3M on fixed tangible assets and £647K on software to give a free cash flow of £5.6M, although some capex valued at £4M has shifted into 2017 with the total capex of £14M expected in 2017. Of the free cash flow generated, £3.4M was spent on dividends and the cash flow for the year came in at £1.9M and the cash level at the year-end was £13M.

The external trading environment was tough; the shopping habits of the group’s customers are significantly influenced by the weather and for much of the year this had an effect on performance. In October the group moved from the AIM market to the official list of the LSE.

Like for like sales grew by 0.7% and online sales grew by 3.6%. The group’s market share ended the year at 3.4%, which was a 0.1% fall on the previous year. During the first half of the year, sales increased by 6.5% with like for like store sales up 2% and online sales up by 4.2%. The cooler extended summer suppressed demand in traditional categories such as dresses, T-shirts and swimwear and as a result of this, customers continued to stay away from the high street.

This meant that in the second half of the year, total sales growth slowed to 4.1%. Store like for like sales declined by 0.6% and online sales grew by 3.1%. The recurring theme of a lacklustre summer remained a drag into the autumn and record mild temperatures were recorded into December. In the early part of the autumn, the group’s strategy to “de-weather” their coats and knitwear departments worked well but they had planned for these ranged to reach more normalised volumes by November and due to continued unseasonal conditions this did not materialise. Affected by the same conditions, the competition started implementing heavy discounts from the Black Friday period onwards which made it harder to achieve sales at normal prices.

After Christmas, Q4 started well and like for like grew 12.1% during January due to a strong demand for sale items. Due to a long period of cold wet weather this spring this growth was short lived. To ensure that stock levels were well controlled despite the disappointing sales performance, the group made more discounts which were higher than in the prior year. The negative impact on margin was mitigated by a higher buying-in margin due to improved sourcing and more favourable exchange rates. As a result, the terminal stock level was lower than last year.

In order to improve the appeal of the Bonus Club, the group have introduced new member benefits including welcome packs and birthday vouchers. In Scotland they are testing a top tier scheme called Diamond Club which has an annual fee of £10 with customers receiving benefits such as free delivery and advance notification of new collections. To support this initiative, a regional TV test was conducted and whilst financially there was little measurable upside in the short term, it created an increase in brand awareness. The plan is to repeat this on a national scale from September this year. The campaign will be supported by the new brand ambassador, Mark Heyes, a TV fashion presenter who will be offering style advice to customers.

The group has been focusing on trying to “de-weather” their coats and knitwear ranges in the traditional autumn season. The offer at this time comprised fewer options but with a broader selection of lightweight layering. This proved successful between August and October but as the mild conditions continued into November, the early success could not counteract the poor performance of these categories as the weights of clothing increased in the anticipation of normal winter weather.

Whilst the group has had good progress in their core categories, there was less success with more seasonal departments where they repeated best sellers for too long and did not introduce enough new products. Blouses, dresses and skirts were key areas where there was insufficient progress and customers have said they basically want more on-trend items and more modern cuts. A review of the supplier base has led to the conclusion that they need to bring in new suppliers in Turkey and India that will give them more focus on new styles and the flexibility to repeat best sellers through shorter lead times.

The existing three year contract with David Emanuel expired at the end of March at which point they decided to terminate the agreement after a nine year association with the timing of the change coinciding with the introduction of Mark Heyes as brand ambassador.

The strategy of opening five new Solus stores and about 15 concessions and other locations each year will continue. During the year, 140 stores have seen their fascias replaced with a further 40 to be replaced this year to complete the programme. Other visual improvements have also been undertaken.

During the year the group launched an improved stock delivery service to all stores in Q1. This was to improve style choice and size availability on the sales floor by shortening the interval between identifying the need for an item to be replenished and the item being available for sale. The initiative also introduced out of hours deliveries so that stock replenishment can take place without inconveniencing customers during trading hours. Test stores indicated that there was a sales gain as a result of this operation which more than funded the incremental cost. The benefits of this are likely to be realised to a greater extent over the next two to three years as other system and process improvements further enhance stock availability. With the impending increase in costs following the introduction of the living wage, the group continue to look for more productive ways of working.

At the end of the year, online sales represented 7.3% of total sales which is disappointing. This has been a challenging year for the online operation, which only managed to achieve a £500K increase on the prior year. The weakest months were either side of the responsive site implementation in July, and in December when the group experienced weak trading following Black Friday.

Improvements in the forthcoming year include a website re-platform to “Demandware” which with the new EPOS store till system will facilitate an online gift card functionality and more aligned store and online price initiatives such as 2 for 1. An improved fulfilment service will enable a later next day delivery cut off and the ability to track parcels. Looking ahead to this year, the group are currently finalising a plan to replace a twenty year old legacy ERP system which sounds expensive…

During the year it was announced that CEO Beth Butterwick was leaving the company. She is being replaced by Helen Connolly who joins from Asda where she was senior buying director for the George clothing business. Mark McLennon also joined as a non-executive director and he is currently Global VP for IT at Unilever so should have some good experience for when the group upgrades its systems. Also, Sun’s nominee director, Sergei Spiridonov, replaced Michael Kalb as a non-executive director buy Michael will continue with company as a board observer, whatever that means.

The beginning of the coming year has continued to be tough due to poor weather but the board’s full year expectation is unchanged provided trading conditions normalise, which sounds a bit ominous. Looking ahead there will continue to be external factors that affect consumer confidence and the cost of doing business such as the Brexit vote, rising costs driven by the living wage, forex rates and business rates.

At the current share price the shares trade on a PE ratio of 6.8 which falls to a cheap-looking 6.1 on next year’s consensus forecast. After a 5% increase in the total dividend, the shares are yielding 5.9% which increases to 6% on next year’s forecast. At the year-end the group had a net cash position of £12.4M compared to £10.2M at the end of last year.

Overall then, this has been a difficult year for the group. Profits are down and although net assets did improve, the operating cash flow also declined. They did manage to produce a decent amount of cash flow but capex is expected to increase three-fold next year which would wipe this out. Like for like sales barely grew and were negative in the second half of the year as the group suffered from a cool summer, a mild autumn and a cold and wet spring. Of more concern, however, is the fall in market share and the lacklustre online sales growth – perhaps the new website will help this?

Going forward, the new ERP system could potentially have teething problems and there are also risks surrounding the new CEO. This year has started slowly and the weather since then has hardly been very summery so I think there is a real prospect of another profit warning here. It is true that the shares are now very cheap with a forward PE ratio of 6.1 and dividend yield of 6% but I am starting to wonder if even this low price covers the risk here and I am thinking of selling up on what has been a disappointing investment.

On the 28th July the group released a Q1 trading update. Sales for the quarter decreased by 3.6% and store like for like sales fell by 8.1% with online sales down 2.7%. Trading during the quarter was difficult due to continued poor weather but despite this board expectations for the full year remain unchanged as long as trading conditions normalise through the autumn season. This seems a bit ask to me and I am not sure if management really have much of a grasp of the problem –one to avoid for now I think.

On the 21st September the group released a trading update. Notwithstanding difficult trading conditions in July and August, overall performance was in line with management expectations for the half year but trading in September has been extremely poor, with the weather again being blamed. Store like for like sales for Q2 will be about 8% down with a similar result in the half year.

The hot September has prevented the group from gaining a representative measure of the strength of the autumn ranges but their perception is that the clothing market generally has become more challenging so the board are lowering the profit expectation for H2 with the view now that full year profit is likely to fall between £5M and £7M.

The financial position remains strong with a net cash balance of £9M. This is all very poor, and it is becoming increasingly clear that the group has real issues. Still, the new CEO is only recently in the post so she may yet turn things round.