Laura Ashley has now issued their interim results for the half year to 2014.
There is no doubt that the last 6 months have been difficult for Laura Ashley. Revenues were down across the board with store revenues down £6.2M, E-commerce down £1.3M and non-retail revenue down £500K. Cost of sales and operating costs were also down but this did not stop the operating profit from falling £1.1M to £6.9M. At least the share of associate (the Japanese business I believe) operating profit marginally increased by £300K but this and a small amount of finance income was mitigated by the £400K cost of closing unprofitable stores. A slightly lower tax charge on the smaller profits meant that profit for the half year was £700K lower at £5.5M. Not a total disaster but very disappointing and this actually came as a bit of a surprise given management’s fairly bullish statements previously.
After the disappointing income statement, the balance sheet gives some cause for concern too. Total assets were down by £9.5M driven by the worrying £16.8M reduction in cash reserves on the end of last year. This was only partially mitigated by the £6.1M increase in inventories and the £2.2M increase in trade receivables. As far as liabilities were concerned, trade and payables fell by £2.8 which was counteracted by the £1M increase in pension liabilities. In total, liabilities were also down but not as much as assets so net tangible assets fell £7.4M in six months to £53.1M.
As we could have predicted from the peek at the cash levels from the balance sheet, the cash flow is a bit of a disaster. Cash taken from the income statement was down by £2.2M but the group got a bit hammered by adverse movements in working capital. £6.1M was tied up in higher inventory levels, £2.2M was tied up in increasing receivables and a decrease in payables accounted for £2.8M. This all meant that the cash generated from operations was a negative £2.9M, a whole £6.5M lower than the same period of last year. Added to this was £2.3M paid in tax and a massive £10.9M paid out in dividends. This, along with a small amount of capital expenditure meant that there was a cash outflow of £16.8M. Clearly, these huge dividends are not sustainable for long if this happens again as those cash reserves will not last forever if the group loses nearly £17M every half year! The second half of the year is usually better with regards to cash generation but I can’t see this huge deficit being turned around before the end of the year.
As far as contribution is concerned, profit from stores actually increased to £6M but there was a very concerning £1.3M reduction in profit from e-commerce (and mail order). Previously this has been the great hope for the group so I would like to understand what went wrong here. The hotel is currently making a small loss but I am not sure if this was ever expected to turn much of a profit. The contribution from the associate was decent, up £300K with contribution from licences and franchises down by £200K but still holding up fairly well at £5.9M.
It is also disappointing to see the excuse that the chairman gives for the poor performance. Yup, the weather. Apparently the cold weather affected clothing and the hot weather affected home furnishing sales. I am not sure what kind of weather Laura Ashley needs to perform well! Some of the reduced store sales were due to the closure of unprofitable stores as two new stores were opened and five closed but like for like sales also fell by 2.2%.
One possible explanation for some of the loss of business in e-commerce was that systems “enhancements” in customer ordering were undertaken which had some impact on operations but should enhance performance going forward. Work is also continuing on website development and enhancement so we will see if this has an effect on e-commerce performance in the second half.
Within retail, furniture was the one product category that actually improved performance on the same period of last year as like-for-like sales were up 0.7%. There were a number of product launches during the year, including snugglers and new colours in the popular cabinet ranges. Along with the rest of the products, Home Furnishings reduced sales – down by 2.7% on a like for like performance. Like for like sales across all UK retailers in this category fell by 2.4% so Laura Ashley underperformed the rest of the market. Moving into the second half, the product offer is apparently stronger, however. Like for like decorating sales fell by 1.6% with Laura Ashley once again underperforming against all UK retailers whose sales fell by 0.5%. Early Autumn response has been good to the ready-made curtains and paint ranges, however. It is the Fashion business, though, that was the really poor performer as sales reduced by 6.6%.
The hotel was officially launched in August and turned in a small loss. The international franchising operations expanded further and at the half year point there were 280 franchised stores, 17 more than at the end of last year and new stores were opened in Japan, Australia, South Korea, Taiwan, Hong Kong, Spain and Bulgaria and new agreements have been signed for new stores in the second half of the year in the Baltics, Poland and Armenia. Against this backdrop, then, it was disappointing to see a 3.6% reduction in revenues on the first half of last year. Trading for the group in the first 8 weeks of the second half of the year continues to be disappointing with like for like revenues down 1.3%.
Overall then, this update is a bit of a disaster. There was no warning as such and the fact that the performance is being blamed on the weather does make me wonder about the competence of the board. Profits were down, net assets fell and the cash flow was terrible, partly due to adverse working capital movements. Having said that, the company doesn’t turn into a lemon in 6 months, there is still no debt and a decent cash pile. At the current share price the yield is 7.9% which is an incredible return. It is nowhere near covered by current earnings, however and the cash pile will not last forever. This update was a shock but not enough to encourage me to sell up. I won’t be adding more until I can see if this is a blip or the start of a more steady decline, however.
On 13th December Laura Ashley released a management statement covering the 19 weeks to December 7. During this period total retail sales decreased by 2% year on year with like for like sales falling by 0.7% which compared to year to date figures of retail sales down 2.1% and like for like sales down 1.6%. There were some significant new licensing agreements signed that will benefit the group next year but this year licencing revenue collapsed by 16%. 23 new franchise stores were opened abroad and the one slight good point was that online sales increased by 1%. This is clearly a disappointing update but some comfort may be gained from the fact that the rate of decline in like for like sales seems to have slowed down.
On the 15th January, the group announced that they had sold their position in Moss Bross for 84p per share. Moss Bros have just reported some good results and the share price responded accordingly so I guess the board decided to realise their profit and get a bit of cash in (the deal should bring in clost to £8M gross).
On the 20th January, the group announced a bonus dividend of 1p per share to “show their appreciation to the shareholders for their continued support”. Not sure about that, but it is always nice to get a bit of a cash bonus. I guess most of the cash from the Moss Bros disposal is coming the way of shareholders then. The ex-dividend data is the 29th of this month but it is quite strange that this has been announced before the update on Christmas trading.