LON:CRAW | Crawshaw PLC - Those Football Results Put Me Right Off Those Meatballs!

29th Jun '16 by Dearg Doom

28 comments 16473 reads

Crawshaw (LON:CRAW)

Share Price 77p (down 2.3% today) Market Cap circa £62 million

About the Company

A chain of butcher shops offering fresh meat and food-to-go from an increasing number of retail units. The management is top class and growth expectations are real. Hence my watching brief on the company.

Crawshaw's sales are split between the fresh meat counter and food-to-go section in a 2:1 ratio. They waste practically nothing. Their fresh meat wastage is below the industry average. The reason is that any meat leftover with a short shelf life can be used in their food-to-go operations. Crawshaw plc can opportunistically, when available buy meat with a short shelf life at a large discount from meat wholesalers. This occurs when supermarkets have unexpectedly reduced their orders or the wholesalers have excess meat. This a definite plus for Crawshaws food-to-go operations.

The Crawshaw's price advantage over the major supermarkets is supposedly around 33%, and when set against the discounters Lidl and Aldi is circa 15%.

Turnover at an individual Crawshaw butcher fresh meat shop is about twice that of a traditional butcher shop. Even better turnover figures are given if food-to-go option is included at three times turnover. Turnover in the fresh meat and food-to-go shop is currently around one million pounds per store. Each new store is reportedly cash positive from day one with repayment of outlay depending on store sales of between 1.5 and 4 years.

Trading update

LFL sales down 1.9% look somewhat underwhelming. Reasons cited include reduced footfall due to the timing of Easter, seasonal bad weather, international football and EU referendum.Too many excuses perhaps.

Cash margin on sales up 1%, so management have not taken their eye off the bottom line.

Total shops now 47 an increase of 8 with another 7 shops to be completed by the end of the year.

Group sales were up 37% for the first 20 weeks appears to depend completely on new store openings.

Company's Initiatives

In June they opened their first standalone fresh meat factory shop in West Bromwich. Their second standalone fresh meat factory shop will open over the summer.

They also plan to open their first fresh-meat-only store on the high street to expand into smaller footprint retail space. There must be plenty of empty spaces on high street available so…

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Dearg Doom

30th Sep '16

£CRAW Share Price 33.5p Market Cap £31.6 million

Recent Trading Statement

Crawshaw’s plc management knew precisely how trading was going two weeks ago in their RNS. Management may have just wanted to soften the blow in two separate RNS announcements rather than one. Trading in H1 for like for like sales was down 4.4%. Worse again to learn sales in the first 7 weeks of the H2 were down 15.8%. The company seems to have in place a multi-strategy plan to get sales back up. 2^nd half sales should show like for like sales reduced to a sub 10% percentage loss in sales in the period up to Christmans

Disappointing Profits

My own crude back of envelope figures show that if the £9.8 million gross profit is divided by the 49 stores, this works out as a gross profit of £200,000 per unit for the 1st 26 weeks. However after the €10 million plus administrative costs, we find that Crawshaws plc managed to show no profits, but rather a small statutory loss. Very strange!

Gross Margin looks fabulous but Net Margin at end of the day was negative. The sizable administrative costs need to be broken down for investors to understand why profits are not in view already.

Capex is being funded by cash, and there are no borrowings and hence no interest payments. All the stores which have been held for multiple years are profitable. New stores don’t contribute as much in year 1, but do a lot better in their 2^ndyear when sales levels mature to a more consistent basis.

The company’s additional 9 units this year were added using £2.3 million of their own cash. I would expect on average, no contribution to profit from each unit given the once off start off costs of 75K per unit in the first year. The second year should definitely show some profit contribution per unit.

Future Profitability

Let’s say that each unit average sales drop 15% to say 850K per store. Allow for a reduced 10% profit margin makes 85K. Therefore 85K x circa 50 stores gives £4.25 million pre-tax profit. Deduct directors’ fees of 800K and depreciation of 1 million per year leave a potential pre-tax profit of £2.25 million per year. On this basis, in two years’ time or so based on its payback period projections, the company should nearly have these profits clean each year without being encumbered with any expansion ambition.

On that basis, the company is selling at a market cap of 31.6 million less its cash holding of £2.6 million gives 12.1 times earnings for circa 2019. That’s the particularly dull version of profitability.

The potential upside for profits will come from the £4 million credit facility per year, which should see 12 extra units per year added which will potentially add £1 million extra profit after each unit’s payback per year. It is possible that in 5 years’ time, the original £2.25 million from above + new 5 million profit (from 60 extra stores) gives us a profit of £7.25 million in 2021.

Obviously, depending on what base figures you use, one can get a bigger upside than I have anticipated. Given that growth stocks are scarce on the ground, than its share price possibly represents a good entry point. Is that rate of growth exciting enough is the key question?

Figures presented by the company are for standalone units, which some investors might consider are misleading as they do not appear to take fully into account the central costs of head office administration, director fees and transport costs.

The Share Price

The sellers are in control at this price level with plenty of supply limiting the share price upside. The share price is more likely to drop in the short term. There is no guarantee of meat sales coming back and at what profit margin. Break-even for the group may be around 30 shops. Additional shop units will drop down to the profit line more quickly if the right shop locations come up.

Final Comment

Considering everything above, I have added to my existing holding under the 34p level. I feel the company can show improving profitability going forward. The company has the appropriate risk/reward level to be worth an additional purchase.

I would be interested in hearing other investors own insight into the company's future profitability.

Regards

PS (Information for entertainment purposes only. I am long this stock)

smallcapman

1st Oct '16

I can't disagree with what you say, but clearly you are backing the management team, or more likely, their superstar CEO to turn things around. On that PE I wouldn't invest unless everything was going swimmingly well.

It was a big enough gamble as it was, looking ahead a few years when the rollout was more mature, but being unable to even show a net profit is too much of a gamble for me.

Surely a change of strategy is enough of a red flag to move on, and maybe come back when it's clear the new path is working?

Or have people fallen in love with the company?

PJ0077

A business that finds its LFL sales growth declining at 15% is demonstrating a number of things:

it's customers are very price sensitive & have limited brand loyalty
is operating in a very competitive market
has a management team that have underestimated the market growth potential

The high rating placed on this stock was premised on the roll-out of a profitable chain of 40 stores to 230+ stores. There is no evidence that this is feasible. Crawshaws open a store & it is profitable (ex central costs) for the first 12 months. Then the local supermarkets adjust down their meat prices & this profitability evaporates. You'd have thought an ex-manager from Lidl would understand this tactic of the food retailers!

As investors we believe easily what we hope for earnestly. Yet hope has rarely been a winning investment strategy.

dmjram

I'd be a bit wary of buying into the management team story for several reasons:

1. They reverted to familiar retail excuses when things started to go wrong, blaming external factors (weather, football etc) rather than acknowledging it was primarily down to their own mistakes on pricing.

2. The accounting for store EBITDA ignoring all the support costs essential for those stores to operate is really a contribution and not a measure of store profitability.

3. From reading their profiles, they seem to be from big corporate retail backgrounds - ASDA, Morrisons, Lidl. The skill set needed to roll out a format in a small company does'nt neccessarily overlap significantly with those acquired in such companies and the resources available to them will be much reduced from what they are used to.

Doesnt mean they won't succeed of course but the risk-reward profile just does'nt look attractive IMHO when the headwinds on margin from the falling pound and recent collapse in LFL sales, which I suspect maybe related as prices were set to maintain profitability leading to the customers walking, are added to the mix.

tads

Noel Collett was responsible for the expansion of Lidl. I must say I was very impressed with him .

extrader

Hi dmjram,

Maybe your criticism re 'big corporate retail backgrounds' is validated - and compensated - by their bringing back the former CEO Crawshaw...?

ATB

3rd Oct '16

I'm sure he's an excellent manager and did a great job at Lidl.

The issue in a small company environment is that he (and the FD) will be missing the huge support teams that large corporates supply eg a property/estates dept to source stores and arrange fit out, legal dept to iron out lease agreements, commercial finance dept with sophisticated BI systems to provide in depth timely analysis of sales/margin, treasury dept to advise on currency hedging etc etc. It's far more hands on in small cos with far greater reliance on individuals rather than systems/teams. Hence the comment that past experience may not be that relevant.

johnrosier

4th Oct '16

On Thursday, following a meeting with management I wrote the following. For what's its worth, (and some might think not a lot, given recent performance), I thought I would share this as I think the markets pessimism is being overdone.

I think the risk/reward from here is attractive and today have succumbed to temptation and added some more.

I have trade this stock a few times over the nearly three years I have held it and with today's purchase am nearly up t the maximum number I held before booking some profits in June 2014.

Conclusion: Clearly the events of the last few weeks have been extremely disappointing but I am pretty confident that Collett and Richardson will get the story back on track. From a business point of view, I think it should be seen as a setback from which management has learnt some valuable lessons and which makes very little difference to the long term destination; it might be that reaching its 200 stores talks a little longer and that the mix of stores is a little different from that envisaged a year ago. Of course, from the stock market’s point of view, this is a disaster and clearly the whole business model is broken. I have confidence that Collett and Richardson will do what is necessary to achieve their immediate task of getting customers back in the stores and spending. That is the immediate priority for its year-end trading statement in January. I know its house broker has published a target price of 60p. That seems reasonable but if it does not get sales growing again 60p is too high. If they do and people believe again that it can achieve its long term objective of 200+ stores, it is too low. I clearly went into this month holding too many; perhaps I had too much misplaced confidence that the rollout would be flawless. Hopefully I have learnt some lessons from the experience. Would I buy today if did not already hold? A resounding yes but probably not 3.0%; I would probably buy 1-2% and hope to add on good news! Happy Holder!

Yesterday I attended a meeting with Noel Collett CEO and Alan Richardson, CFO.

The post interims presentation can be found HERE

In yesterday’s results they gave a good explanation of what had gone wrong and what they were doing about it. At the meeting they put a bit more meat on the bones.

Given Collet’s background at Lidl and with the plan to expand to 200+ stores they had put in a lot of processes and systems. This meant much more standardisation across the estate. Initially the results in the legacy stores, (30 out of 49 stores), were encouraging. However, in June sales started to drop off. Initially they thought this was due to external factors. It was not until July that they suspected something else was afoot and started to look inwards.

He described it as them having created the perfect storm. Too many changes in the legacy stores. The value proposition had not changed but through changes in pack sizes and price points they had created an impression that they were not as attractively priced. Customers voted with their feet.

He admitted they had got things wrong and had almost over professionalised the business, especially at store level. They had “simply made too many changes”.

Other comments: Maybe they had introduced a little too much corporate branding; shops looked a little too supermarkety; looked more expensive, when it wasn’t; need to be a bit more spit and saw dusty again.

The problem really was in legacy stores where loyal customers didn’t like change. The new stores, on average, have performed to plan. Even here they have learnt that High Street stores in towns perform better than the City based shops, where building a local loyalty is more difficult.

They have given store managers much more flexibility to provide “offers” that meet their local market. They accept it is more difficult to get customers back than retain existing ones. It is down to managers to get them back in, through re-introducing old offers and telling the customers. Signs saying “your favourite prices and products are back” for example.

It plans to open two more shops this year but none over the festive period. It is paring back next year’s opening plans to just seven stores with none in Q1. They are implementing a six-month pause whilst they focus on restoring sales momentum and assess future opening plans. This will include more factory shops where the return on investment is extremely attractive and net margins higher.

Factory shops are not located in factory outlet centres as I read someone suggest the other day. He questioned how many sites it could potentially open given that shopping parks, with fashion shops, would not really want a butcher on site. That is perfectly reasonable but its latest opening in West Bromwich, highlighted in the presentation, is a typical site. It is on a main highway through the town and is an old Little Chef. No fashion shops in sight. Parking for 10+ cars is the important aspect.

Factory outlets have lower capital spend to set up, lower costs due to not offering food to go and lower rents, have lower customer numbers but double the average spend of its high street stores.

rhomboid1

Good post John with some great detail, I like the idea of a little chef location but surely the rent and rates must be a magnitude greater if you're competing with fast food operators for sites? Also there seem to be a lot of holders clinging on to the hope that a golden nugget exists amongst the wreckage of the original business plan, I'd want it trading at a far far lower price before getting involved FWIW! It just seems a bit of a car crash where you're being told don't worry the driver has learnt his lesson. Finally using surplus meat sources seems fraught with risk as good meat is less likely to be going begging as many an ecoli outbreak in butchers shops attests.

Sorry to be so negative!

carmensfella

Forget about the surplus meat being a driver. They simply buy cheaper and efficiently and do their own prime cutting into value sized packs.

For those who want to meet management and ask questions then why not come along to my next Mello investor evening on Monday 17th October in Beckenham. Go to www.mellomeeting.co.uk and register with me beforehand as I already have 37 booked in and we may be fully booked close to the date.

David

Hi David
Thx for the response,wasn't the surplus or short dared meat thing part of the original plan or have I not been paying attention? I can't otherwise see how they can realistically gain & maintain a price edge through sourcing against the supermarkets etc? Re Mello I'm sure it'd be useful but I'm overseas. It'll be very interesting to see how Crawshaw turns out, hopefully it'll reward the patience of longstanding investors such as yourself .
Cheers

LongbeardRanger

Given that Crawshaw have recently taken over a butcher's near me (in the Arndale centre in central Manchester), I thought I would go along and take a look and report back with my "findings" (obviously these are anecdotal and not in any way scientific - but may still be useful).

First off - the store in question was acquired by Crawshaws and was previously a somewhat downmarket butcher's. Although there has been some updating of the signage, trade dress, etc, the store still has that rather downmarket appearance, it is definitely on the "value" rather than "quality" part of the spectrum. But that said, the Crawshaws signage above the produce is neater and more professional than what was there previously.

In terms of location, this store is in a large shopping centre which is mostly clothes shops, electronics, and so forth rather than somewhere to shop for essentials, though it does have an Aldi, a food court (including a butcher and fishmongers), a Wilko, etc.

In terms of produce - I have not done a comparison on price - but what there was appeared reasonably cheap and looked "ok" quality, but nothing better than that. Certainly no better or more appealing than the meat on offer in the nearby Aldi and less appealing than the meat available at the traditional butcher in the foodcourt.

To be honest - based on this one store - I can't get excited about the potential of this concept as a rollout. It's not that it's bad, it's just.....unexciting. There doesn't appear to be anything particularly unique or good about it.

Having said that, I think it is a recently acquired store so it could be that Crawshaws have not finished transitioning it into one of their own - and it is probably fair also to say that I am not in their prime target demographic.

I would agree with the observation John Rosier reports, that these stores are likely to do better on the high street in towns rather than this type of city centre location, so that is a factor as well. This particular store definitely seems to be quite out of place.

I believe there are a few other Crawshaws relatively near me, so I'll see if I can get to another one (perhaps in a more promising location for their offering) and report back.

Phil

That's a great review, Phil.

Michael Porter summarised that there are only two winning business strategies: 1. lowest cost 2. product differentiation.

Hopefully Crawshaws will identify one of these.

28th Nov '16

Is this a dagger I see before me

or is it a butchers knife waiting to cut investors to the bone?

The Crawshaws share price collapsed again today. This is the second day in a row without any major news concerning the company. One big seller in the market sold 300K shares at 20p. Market makers were noticeable as being very reluctant to deal at market prices on the bid side unless in small lots of 5,000 shares or less.

We must begin to suspect the turnaround story has continued to worsen rather than stabilised. Alternatively, there may be possibly be a boardroom row occurring which may be lead to some unexpected resignations. Any of the above rationale would provide some reason for the continuing descending share price.

Having successfully avoided the high p/e of Crawshaws when the share was above 80p, I launched into a small opening position purchase on the day of the profit warning. I have subsequently made repeated small purchases following down the share price continued trending downwards.. Obviously,I was expecting the bottom at some point to be found.

The most recent two days of steep negative share price movement suggests better-informed investors know something which other investors don't yet appreciate fully as yet. Mind you, I decided once more to step into the bloodied water and make a further small purchase at 22p! Averaging down on a share does provide some temporary comfort.

People I reckon are still are eating meat. Meat selling is still a highly profitable area of business. At some level of normal sales, each shop must be fairly profitable. Poor performing shops can be closed. The negative share price performance is being driven by the reasonable assumption that sales and margins are declining, competition is keener and the company's own expansion plan is being slowed.

Does Crawshaw represent a value share now? No one knows in reality. Unless the large head office administration costs are cut than investors will have little else to see for their investment in the immediate future. Nice gross margins mean nothing unless they generate cash for shareholders after expenses, depreciation and amortization,

I certainly expect some RNS announcement from the company very shortly on the recent share price movement, even if it is just simply to ease investors' concerns or at least keep them fully informed that no market sensitive news has happened. At that point, there may be a temporary rally in the price.

The key take away point is to remind myself to resist buying shares in companies when the story has fundamentally changed. In this case a hyped go-go growths stock is now an ordinary run of the mill company where profits are increasingly a challenge to earn.

PS (Meat eating existing shareholder who has been bloodied and butchered to date.)

Rusty2

I think the share price will bottom out soon maybe 20p unless there is something serious going on we don't know about.

I have noticed there have been some big falls recently on no news on a few shares such as Craneware (LON:CRW) and Xaar (LON:XAR). Craneware (LON:CRW) seems to be to do with Trump, they have bounced a bit today with many buyers. Not sure why Xaar (LON:XAR) have fallen so much.

Nick Ray

It's very odd. After a month of very little volume or direction, there are suddenly two days of high volume.

It looks like someone sold 100,000 on Friday in several packets about 11:25-11:35. After that either the same person continued to sell more packets throughout the day or others joined in. As you say it all culminated in someone getting rid of 300,000 in one go near the end of today. So either it is just some individual who was heavily invested in Crawshaw (LON:CRAW) (about £300K's worth altogether) deciding to get out or there is some news about to break which a small group have acted on.

29th Nov '16

Yesterday afternoon I posted the following on my site.

I thoroughly enjoyed the recent Stockopedia webinar on profit warnings and think there were are some great lessons to take on board. I have printed off a few of the slides to keep on my desk for the next time the inevitable happens! The webinar can be found HERE and is well worth watching.

As a shareholder in Crawshaw (LON:CRAW), I noted the share price weakness in the last week which has carried on today. Since the webinar the share price has dropped another 27%. It “starred” in the webinar and I am wondering whether that is behind the renewed downward momentum or whether there is something else going on; does someone know something I don’t?

At the current share price, (mid 23p) the enterprise value, (market cap + debt) is close to £14.2m compared to forecast sales for the current year of £45.7m, a ratio of just 0.33. Many will say that is irrelevant if it is not making money which is difficult to refute. To hold the shares one must have confidence that as is grows its retail estate, revenue and profits will cover the necessary investment it made in central overheads, to successfully deliver its strategy. Not long ago people believed the story and had faith that the management would successfully implement the strategy. It was very highly valued!

It then had a setback, announcing in September that like-for like sales had been disappointing. Given the prevailing valuation the share price was understandably hammered.

Currently I think, sentiment towards the stock is at polar opposites to where it was before September’s profit warning. Back then, the story was exciting, management were superb and the opportunity huge. Now, who would ever think you could make a success of a discount butcher and food-to-go chain, the management are useless, just get out. In short, I think we have moved from a situation where the market was taking a long-term view that it would achieve its targets without any glitches, (explicit in the valuation), to one where it is taking a short-term view and has little faith in the business achieving growth, let alone a profit.

I accept the next news is important. I am assuming the next announcement will, like last year, be in January, just before its year-end. Investors will be hoping to see an improvement in like-for-like sales over the festive season. If it does show an improvement I would expect to see a good bounce in the share price. If it doesn’t, then I guess it will remain friendless and there will be renewed selling.

I am coming at this with the view that management will get the show back on the road. They admitted and identified their mistakes and I think have the retail experience to make the necessary changes. When at Lidl, Noel Collett did not find it all plane sailing. I believe there was a period where it had to pause its opening programme while it sorted out some problems. I guess being a private company, that was easier to do.

Another stock that starred in the Webinar was Mysale Group. Ed Croft rightly pointed out that the stock, 18 months on, had not quite got back to the closing price on the day of its profit warning. We have moved on a couple of months from Crawshaw’s profit warning and I just wonder whether there is a possibility that at 23p, we are at the similar stage as when Mysale bottomed out at 40p. It has more than doubled to the current 93p.

I must admit, I would like to see management dip their hands in their pockets and buys some shares. It may be, that with young families etc. they don’t have a lot of spare cash but some signal of their confidence in the business would be nice.

I am in the position that if the share price was to go to zero I would still have made a small profit, (£175!) given the gains I realised at higher levels. On one occasion, I remember being asked why I was selling given my positive view on the stock. Risk control was the answer. With hindsight, I should have been more cautious and booked more profits in the 70’s, 80’s and 90’s so that when hit by September’s profit warning it would not have been as painful. Hindsight is a wonderful thing.

Where from here? Clearly from what I have written above, I think the risk reward is in favour of buying at this valuation. But will I add here? I am so tempted but am resisting as I must accept that 2.5% of the Portfolio is ample at this juncture and that maybe someone does know something about current trading that I don’t!

I will be watching with interest but can’t help feeling that there is risk the baby is beingthrown out with the bath water.

Crawshaw released a trading update this morning which is obviously connected to the recent large price drop.

No News Here! seems to be the spin by the company. Here is the RNS link.

http://www.investegate.co.uk/crawshaw-group-plc/rn...

In summary, business has not gone from bad to worse. Some improvement has been seen in recapturing like for like sales. I bought more shares this morning. I have now topped up my holding by 32% between late yesterday and today. The risk/reward looks attractive, but only as part of a holding in a widely diversified portfolio.

Best to read the RNS yourself and make a decision whether to buy, hold or sell. Of course, the right approach could be the 4th option which to ignore the share altogether and look for safer share investments

If directors are not buying shares later today or tomorrow, than reconsideration of the better outlook may be warranted.

Volume today is very high and mostly on the buy side. 500,000 before 9:00am this morning. The price isn't reflecting that though. I am wondering whether there are delayed sells which will appear later to explain what is going on here.

Crawshaw PLC - Those football results put me right off those meatballs!

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Dearg Doom

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