Poundland has been hitting headlines in 2015: at the end of January, Q3 trading and earlier this month with the acquisition of privately-owned competitor, 99p stores. A close analysis of the trading release and a comparison with competitors suggests that fundamental trends at this rapidly growing retailer are weakening.
Third quarter results and the bull case
The headline for the third quarter was revenue up 9.8% YoY. A pretty strong showing. The bull case here relies, in part, on store growth and the company confirmed this story in the quarter as stores numbers continued to grow.
Management estimates that the UK has the potential for 1,000 stores and the company remains on track to add 60 this financial year. The third quarter finished with 573 stores, up 15% YoY, so there is a lot of growth left in the UK and with the international trials opening in Spain, a lot of potential room in new markets too.
Okay, we can already see something here though: stores up 15% but revenue only up 10%? Management didn't breakout L4Ls, a very unusual decision we will look at later, but explained the gap on the timing of store openings. More stores were opened later in the period, this meant that the overall contribution of new stores was lower. In the first half, the company reported new store weeks down 20% so we know that part of this explanation is true.
We will look at this in more detail later but if we are a bull we have the store growth and we know that the last L4Ls reported for the first half of this financial year were up 4.7%, which looks pretty good. We also have that acquisition.
99p Stores Acquisition
The acquisition of 99p Stores is an ironic historical twist: the chain was actually started in the early 2000s to undercut Poundland. The chain rode the growing popularity of discount retail to an impressive £55m valuation, the price that Poundland seems set to pay.
The synergies between the two chains are large. Both Poundland and 99p Stores offer quite a wide range of products and operate from high streets, in the centre of towns, rather than retail parks, on the edges of large towns. These similarities should offer some cost efficiencies. The group will have larger scale in negotiations with suppliers and margins at 99p Stores are far lower than at Poundland.
99p Stores has EBITDA of roughly £6m so…
