I said I'd do another post on H & T (LON:HAT) after my pre-results piece and a little snippet after the results which saw their share price dip another 20%. There are a few more questions I'd rather have liked to know the answers to before writing another post, and so I tried to get hold of management for their take on the subject. I'm coming round to speaking to management as a positive - I used to think its value was dubious, since all management teams are either, by intention or by osmosis, always relentlessly bullish on the company under their ward. Very few people are downbeat on the prospects of something they control. Having spoken to the management of a few listed companies now, I'm rather coming round to it. Perhaps - and this is a very significant probability - I'm overstating my ability to derive value from these interactions, but I reckon both how management talk about the company and what they say gives investors a clue into how the company is run - even if they can't give away the answers to the really penetrating questions.
Fortunately for us, there's a number listed for the FD/CEO in the RNS released by the group. Unfortunately, try as I might, I wasn't actually able to get hold of management. 17 days ago I called a couple of times, the first time being told to call back later and the second time giving my message to a colleague to be passed on. Awkwardly, I was out for the next week-and-a-bit; so unable to chase up; but I gave it another go last Thursday, this time getting through to the PA to the board of directors. I was told, since the board were out that week on investor meetings, to send an e-mail and copy in the PA. Sadly - no response since then.
I must say, a response of some kind - even a short 'unable to answer your questions' - might have been courteous, but I leave that entirely up to the reader to decide. If I actually held shares in the company, I would certainly be a little more aggrieved.
More importantly, here are the two questions I penned in the email; the more key ones I wanted to ask, along with my thoughts:
Firstly, regarding store growth, and on your plans for the remainder of the year/ further forward. I see you talk about consolidation and rationalisation – is there a feeling the group overextended with the number of store openings in recent years? I note you had fairly stringent requirements with regard to new openings in the sense that you pencilled in pretty hefty decreases in gold-related profits. Have these assumptions generally proved to be conservative enough?
I'm particularly curious about how the board feels their expansion plan was executed over the last few years, particularly given the teasing little tidbit in the RNS on how the board thinks a 'degree of consolidation or rationalisation' may be likely. In their annual report they talk about how stores had benefitted from 'super-normal' profits (a lovely economic phrase!) from gold, and in their interims they say that in all store investment proposals 'an assumption has been made for a 50% fall in gold purchasing profits in both years 1 and 2'. A good board will only invest if they perceive return on capital to be greater than cost of capital, and the board say they've made conservative assumptions with regard to gold. It should follow, then, that if everything they says fits, when the stores mature they should have a store base earning a decent return on capital. Either way, the deviations from this base case inform us as to how the business will perform.
Secondly, and on a similar vein:
On store maturation, could you give me a rough outline of what that looks like? The sort of time scale from opening to peak profitability, for instance, and to what degree you think new stores will be able to match the older estate. I note average pledge book per store is down significantly on 2007, a year I chose to try and remove some of the exceptional gold effects, and per store profit is similarly down. Is this a fair comparator?
It's a similar sort of question, but combined with the first I think the two avenues can sum up most of the driving forces behind the business. The bull case for the company is essentially that management have prudently invested and store maturation will drive up profits over time while the market is over-concerned about the effect of the gold price. The bear case is that the company heavily over-expanded with over-confident assumptions, and will now be stuck with capital and expensive operating leases tied up in unprofitable stores while the alternative credit market moves quickly around them.
The answer to the 2007 comparison would be elucidating, I think, because it's particularly interesting given how gold's moved since then. Even with the gold profits, per-store profit is down since 2007. Is that down to having lots of new and developing stores, or is that because the business is fundamentally weaker? Answers on a postcard!
I note the gold price has risen fairly significantly over the last few weeks, which is particularly interesting for H&T and ABM, since I suspect the market expectations pencilled in further falls. I know I did, though out of prudence rather than any attempt at forecast. I still suspect the balance of risks is good here.