Bonmarche has now released its interim results for the year ending 2017.
Revenues declined by £3.9M when compared to the first half of last year. Staff costs increased by £823K and operating lease payments grew by £673K but depreciation was down £146K and other cost of sales fell by £1.5M to give a gross profit £3.6M below that of last time. We then see a £672K increase in forex gains and the lack of £1M of IPO fees incurred last year but there was a £417K charge relating to the implementation of the new EPOS system and other admin costs increased by £914K to give am operating profit £3.4M down. Finance costs remained broadly flat but tax charges fell by £919K which meant that the profit for the period was £1.5M, a decline of £2.5M year on year.
When compared to the end point of last year, total assets increased by £4.4M driven by a £4.7M increase in forex hedging assets, a £4M growth in property, plant and equipment and a £1.2M increase in intangible assets, partially offset by a £3.5M decline in receivables and a £2.6M fall in cash. Total liabilities also increased during the period as a £918K growth in deferred tax liabilities and a £1.1M increase in payables was only partially offset by a £607K decline in current tax liabilities. The end result is a net tangible asset level of £30.9M, a growth of £1.9M over the past six months.
Before movements in working capital, cash profits declined by £3.5M to £3.8M. There was a cash inflow from working capital but this was less than in the first half of last year and after tax payments fell by £275K, the net cash from operations was £7M, a decline of £5M year on year. This nearly covered the capex with £5.9M spent on property, plant and equipment along with £1.2M on intangible assets to give a cash outflow of £297K before financing. The group also spent £104K on finance leases and £2.2M in dividends to give a cash outflow of £2.6M and a cash level of £10.4M at the period-end.
During the period store only like for like sales declined by 8.6% with an 8.1% fall in Q1 and a 9% decrease in Q2. Online sales declined by 1.1% with a fall of 2.7% in Q1 and a growth of 2.3% in Q2 but the growth in Q2 is attributable to the disruption experienced last year relating to the launch of the responsive website rather than a pick-up in trading. According to Kantar data, the group’s market share declined from 3.3% to 3.2%.
Sales were affected by certain basic retail disciplines not being sufficiently co-ordinated or robust and the fact that there were parts of the plan that were not executed to the desired standard, which is now being addressed. Customers have provided more positive responses to updated products but there were too many repeats from previous seasons which slowed sales in t-shirts and tops in particular. There were also some high volume product lines which had not moved on enough compared to the previous season’s equivalent and long lead time and a supply chain dominated by Chinese factories restricted the ability to react to changes in seasonal demand.
The group was also affected by BHS, a significant competitor, going into administration in April. Over the following months it cleared its residual stock at discounted rates prior to closing its stores which affected sales in April and May. Also the weather was a major variable which adversely affected performance during the period. Summer 2016 was characterised by weather which was generally too cool to create demand for seasonal basics such as t-shirts and the warm weather in September delayed sales of products such as coats, although it did result in effective clearance of much of the remaining summer stock, albeit at discounted prices.
The performance of the online business during the period was poor. There are a number of factors being blamed for this, in addition to some of the issues affecting the traditional business. The Venda platform website is becoming an increasing barrier to progress and at the end of September they completed the move to a new Demandware platform. This has brought immediate benefits: the customer journey is simpler, the site responds faster, and they have seen the checkout abandonment rate improve. Alongside the website launch they have introduced improved delivery options for customers, most notably free returns by mail or to store (previously customers had to pay to post returned parcels).
By the end of the year the will stop selling through the Ideal World TV shopping channel which is expected to have a small impact on sales but a negligible impact on profit for 2018.
The gross margin increased slightly year on year. Whilst discounting levels were higher than in the previous year, this was more than offset by a higher margin before discounts, despite a slight rise in the cost of hedged dollars. The anticipated dollar requirement for the remainder of the year is fully covered by forward contracts, as is 80% of the expected requirement for next year. The increase in the bought-in margin was a result of some increases in selling prices and a reflection of the low-cost supply base. Although the low cost supply base is beneficial in delivering high margins, it is also inflexible.
The underlying operating expenses increased, however, due to the investment in new retail space, marketing, the new EPOS system and general inflationary pressures including the introduction of the national living wage. Over the past twelve months, they have opened 19 new stores and the national living wage added £600K to costs, £200K of which was mitigated through productivity savings with the further increase implemented in 2018 expected to be largely offset by savings too. Occupancy cost inflation added £400K to expenses, although the actual rent component was only £100K; TV advertising increased by £500K and the ongoing support fees for the EPOS system ware £200K higher than the old one with a one-off implementation cost of £400K to train staff.
Going forward, the group will continue to offer traditional lines but their proportion of the range will reduce progressively so that their products will comprise of more modern lines. During late September and early October they ran a three week national advertising campaign using TV, radio and print media. This followed a test carried out in norther regions which created an increased awareness of the brand there. The brand awareness score among women aged 50+ increased from 85.6 to 95 and website traffic increased by 35% during the campaign. It will take longer to determine the value and longevity of this reaction, however, which also coincided with more seasonally appropriate weather.
The group have identified that in the past they have relied too heavily on a need being created by seasonal weather and one of the requirements is to make the ranges more desirable so that purchases are being made as a result of customers wanting an item. Linked to this, they have noticed that customers are increasingly buying for immediate wear instead of buying in anticipation of wearing later in the season so they are changing their buying decisions to reflect this. These steps will not fully overcome the effect of seasonally inappropriate weather but they believe it will help mitigate it.
For the time being the group are continuing to maintain Ann Harvey as a sub-brand offering larger sized clothing in key stores and online but it represents only 1.2% of sales. As part of the streamlining of the business to focus on initiatives likely to most contribute to growth, they are discontinuing the menswear trial once the Christmas season collection is sold through as it lacks sufficient potential to justify its space in the stores and the resources required to effectively execute it. During the period it represented just 0.6% of sales.
The group have completed the replacement of the fascias of the remaining 40 stores, having begun the programme in 2015. All stores now have the new store front with the exception of two where obtaining planning permission is delaying completion and eleven which are excluded from the programme due to potential relocation.
Market conditions continue to be very difficult and data from the ONS suggest that apparel sales have been weak despite overall retail spending levels being reasonably robust. Despite the difficult trading conditions, the board remain confident that the business will resume growth in 2018. As the group approach the Christmas trading season they continue to face considerable uncertainty as to market conditions and the board believe that the clothing market generally will continue to be challenging. Recent trading has seen an improvement since September, reflecting better ranges and weather so the board’s view is that the full year pre-tax profit is likely to be between £5M and £7M.
At the period-end the group had a net cash position of £9.8M compared to £12.4M at the end of last year and £18.6M at this point of 2016. At the current share price the shares are trading on a PE ratio of 4.7 which increases to 9.2 on the full year forecast. After the interim dividend was maintained at the same level the shares are yielding 8.6% which declines slightly to 8.5% on the full year forecast.
Overall then this half year period has been a difficult one for the group. Net assets did improve due to favourable movements in the currency hedging instrument but profits were down and the operating cash flow declined with no free cash being generated. A lot of things have been blamed for the poor performance – bad weather of course, the closure of BHS, the national living wage age and the old website platform. There is also a problem that the range is just not innovative enough and the clothes are not that desirable.
They are apparently working through these issues and whilst conditions are difficult, the performance is apparently improving. The forward PE of 9.2 and dividend yield of 8.5% look very tempting but I think I would prefer to wait until the performance over the Christmas period is revealed in a couple of weeks before making a decision.
On the 20th January the group released a trading update covering Q3 and the Christmas period to Christmas Eve. Sales increased by 3.3% against the same period last year and store like for like sales grew by 0.8%. A less promotional stance was taken through the quarter and whilst this impacted overall sales volumes, it resulted in a stronger gross margin performance with product gross margin 2.2% higher than last time. Despite the robust like for like store performance, online performance was poor with sales down 3.8%.
Customers have responded well to the improved, more modern ranges in the core autumn/winter product categories of coats and knitwear. This was helped by more seasonally appropriate weather during the quarter which strengthened demand and to some degree counterbalanced the weakness experienced in the apparel market.
There remains a degree of uncertainty as to trading conditions as the group enters Q4 but the board’s expectations for the full year is unchanged, being pre-exceptional profit of between £5M and £7M.
Overall then, not a bad update – mostly due to the favourable weather. The online performance is cause for concern, however, and I don’t think there is much evidence of a turnaround here yet.
On the 19th April the group released a trading update for Q4. Sales increased by 2.7% with store like for like sales down 0.5% offset by a 15.2% increase in online sales which gives a 0.7% like for like growth. If we exclude the extra week, however, like for like sales were down 1.1%. The board expects that the pre-exceptional profit for the year will be slightly above £6M.
Store like for like sales fell in January but were stronger in February and March and the growth in online sales followed improvements made to their online offering. Whilst the board expect the apparel market to remain challenging during the coming year, they are actively taking measures to improve their proposition to customers and they expect to deliver growth in 2018 despite the challenging market.
Overall then it seems the online improvements have really made a difference and the store sales seem to have recovered in the last two months. It is very early days but this looks quite good – I am tempted to try again here and make a small purchase.