Small Cap Value Report (4 Jan 2017) - NXT, BM, STAF, ACRL, SPSY, CAMB | Paul Scott

4th Jan '17 by Paul Scott

62 comments 27179 reads

Good morning!

Thanks for all the positive feedback on yesterday's article, I'm glad people found it interesting.

Graham's having a day off today, so just one report. I intend covering the following;

Next & B&M trading updates - yes, I know they're large caps, but the idea is to get a feel for how retailer bellweathers have done over Xmas. This has read-across to smaller retailer shares - note how M&S, Debenhams & French Connection are all down c.5% this morning, in sympathy with Next's lacklustre Xmas trading.

Staffline (LON:STAF) - in line trading update

Accrol Group (LON:ACRL) - interims to 31 Oct 2016

Spectra Systems (LON:SPSY) - positive trading update

Cambria Automobiles (LON:CAMB) - AGM trading update, in line with expectations.

Large cap retailers

John Lewis Partnership

EDIT - Sorry, I dropped a massive clanger here, and accidentally did a write-up on last year's results, thinking they were this year's! Huge apologies for that. I would blame having a cold, but apparently I did the same mistake last year. Rather embarrassing, sorry.

Anyway, there's no point in having an incorrect section in here, so I've deleted it.

Next (LON:NXT)

Basically, it's not as good as expected, so the shares are down, and have pulled down other retailers too. The prior year comparatives were soft, so growth was expected, but failed to materialise.

Special divis make this a nice income stock, and it's certainly coming back into buying range for me. Although I wonder whether Next may struggle to maintain its sector-leading net profit margin?

It's remarkable to find such a high quality business on a PER of below 10, but where's the growth going to come from? It seems that Next is likely to only, at best, stand still in terms of future profitability, maybe? Hence the low rating.

The market is really only interested in online retailers at the moment, or growing, smaller retailers. Although I wonder if the pricing gap between growth & value retailers may now be getting too wide?

B&M

Very strong UK LFL sales growth of 7.2%, from this pound shop chain. Although 1.1% of that was an extra day's sales, so LFL was really 6.1%, still outstandingly good.

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bsharman

4th Jan '17

Hi. Thanks for the reply. I think that many people still want to touch and feel what they are buying and also enjoy browsing. I think that this is true for both clothing but more so for home furniture/décor (IKEA in Southampton always seems to busy) I watched a Mary Portas talk and Q&A at the Oxford Union a while ago (I'd highly recommend this youtube channel)

https://www.youtube.com/watch?v=p_g-Jc0nOrM

I also thought that this extract from an article she wrote for the Telegraph was interesting:

So what does this mean for the future of retail and our High Streets? Well it's quite simple. Be good. Be good at what you do. Be good in the way you do business. Because if you aren't, you ain’t going to survive. Today the customer is truly king. We can shop where we want, when we want whatever time of day we want and pretty much at whatever budget we want.
And the legacy of the Internet has meant we tap into trends faster, demand more choice, but also gain access to how goods are made so we demand higher ethics, behaviour and standards. We know that digital won’t replace the High Street either. People crave social interaction. We are neurologically wired to connect. That's why farmers’ markets are more popular than ever.

I believe we have reached a place where digital plays an everyday important and continuing part of our lives but we now seek more experiences to compensate for our digital overload. Indeed, 38 per cent of the millennial generation would rather spend on an experience or something ‘interesting’ rather than just buying more ‘stuff’. And so the visionary and creative retailers and entrepreneurs of tomorrow are delivering just that. Where the old school have left the High Street, a new breed is driving in. Ones who put their values at the heart of what they do. And then envelop it with a Positive Experience - what I call The PX factor.

Amazon are opening physical stores in the States and perhaps this is a trend which will be adopted in the UK?

TMFMayn

Those John Lewis figures are for last year, i.e. Christmas 2015!

Paul performed the same trick last year -- looking at John Lewis figures for Xmas 2014 rather than Xmas 2015:

http://www.stockopedia.com/content/small-cap-value...

Tee hee.

ds1980

I don't think people crave face to face social interaction. I certainly don't. I also don't think people go to farmers markets for it. They go to buy good local produce all in one place that they can't necessarily get from the supermarket.

peterthegreat

Yes, I would agree with you, I rarely buy clothes online unless I have tried them on in a shop first but I also think you are right that we (and probably the great majority of posters) are different in our clothes buying habits to younger people who drive sales at clothes retailers. I normally spend less than £50 per year on clothes and get some good shirts from charity shops. Based on my observations of my son and his wife, I don't think younger people do that! More seriously, I would agree with the idea that there is clearly a place for bricks and mortar clothes shops and eventually equilibrium will be reached between online and traditional shopping. However, my impression is that the rapid rate of transfer to online buying has some way to run yet and when the equilibrium is reached, the likes of Next (excellent company though it is) will be shown to have too many shops. I sold my Next shares a few months ago and sold my Ted Baker shares today as I think I underestimated the impact the move online will have on businesses such as these. I would note that Ted Baker had less than 25% of its sales online in its last results and even though they are growing fast, this does not look good to me. I have, however, held on to my Boohoo shares (thanks Paul).

WarrantStar

Hi Shanklin100
It is not MY 548% increase in EPS. It is STOCKOPEDIA's 548%.
The numbers that the 548% increase in EPS comes from are both in the line in the stockreport called "EPS NORMALISED" From 17.4p for historic to 112.6p forecast gives an increase of approx. 548%. Surely the fact that the figures are on the same line means that the figures are comparable.
If you feel that the numbers are incorrect / inappropriate / misleading / badly presented or generally do not suit your purposes, then please ask Stockopedia to make the improvements that you feel to be appropriate.

andrea34

Is it a cold Paul or man-flu? :-) Whichever, get well soon, and thanks for posting.

Davidc

My wife tells me that the quality of clothes at Next has dropped

shanklin100

Hi Warranstar

I give up. You just don't understand the basis for the information on Stockopedia.

Regards, Martin

pyemckay

A few points why I wouldnt buy NEXT

quality isn't as good as it was.

too many shops that will hurt going foward as sales on the high street decline further.

More importantly, the next generation of shoppers are shunning the dowdy fashions of next. BOO, ASOS are most defo where the young fashion conscious shop.

I expect a further warning on trading in the coming year also.

pye

simoan

More importantly, the next generation of shoppers are shunning the dowdy fashions of next. BOO, ASOS are most defo where the young fashion conscious shop.

I'm not sure this is entirely true. I asked my 11 and 15 year old nieces about clothes shopping over Xmas. It seemed to be common knowledge amongst their friend groups that the quality of clothes from Boohoo.Com (LON:BOO) was poor and they preferred the better quality of high street names such as Jack Wills, Hollister and Brandy Melville. I'm not saying they are typical, but it's interesting nonetheless, especially if you hold £BOO like me.

IMHO the "young people only shop on-line" schtick is being overplayed and they seemed to actually enjoy a day out shopping with their friends, having a coffee etc. and so were quite happy to receive cash as a present to fund these trips. If Next (LON:NXT) have not got it right in terms of clothing and presentation to a younger audience, then this seems to be something that is easily fixed. If it gets to a yield of 5% (target price £36) I am going to back the truck up.

All the best, Si

Zipmanpeter

Two comments on Retail and online retailers:

First, from a professional Marketing point of view we should expect BOTH online and high street /retail park shopping (with fusion executions between the two). Some people will like one and some the other. However it looks likely that the (still small) online segment - perhaps 13% by value now will grow at the expense : my view is equilibrium will be closer to 40:60 ie online can triple whilst offline reduces by 1/3. (hence long on BOOHOO albeit much reduced) That still leaves a big High St/Retail park business!!! Interesting stores in good locations will still do well (I also hold DEBS as i think they are navigating a tricky time quite well with growing internet and non-clothes sales and good locations to sell perfume and decorative lamps!). With BHS gone and M&S shaky, there is still a role for Debs with its in house fashion brands. I'd love to see it take on French Connection (FCCN), rebrand the stores and sell the dresses across its estate.

Second, for an under valued stock look at N Brown (BWNG), another holding. This is transforming itself into an online/digital player and is 4 years in. Too much debt but at low PE levels etc when you think 70% of sales are now online. JD Williams is coming back and Simply Be whilst no BooHoo has found a place and will do well in the US I think.

Retail is far from dead!!

PS writing from Nigeria with a dodgy american laptop so no pound symbol available :)

laurie

Dear Warranstar,
Re: STAF
I find it useful to compare the Stockopedia page from the previous year to the current page. The 2 JAN 2016 report (click the arrow next to the PRINT button and a choice of historical pages appear) says that estimated eps for 2015 was 90p. The current page says that Stocko’s view on the actual normalized eps for 2015 was 17.4p.
I consider a difference of this magnitude a warning to spend more time than usual with the annual report so that I can form my own opinion.
In 2015 there was a huge D&A charge (over 13 million) and considerable share based payments (normal for STAF, which many would want to treat as if they were a part of normal compensation/salary). How you choose to treat these will give you wildly different EPS figures.

imranawan

Laurie - as you say there a number of adjustments that every investor needs to consider in the case of Staffline (LON:STAF). To be fair to them Note 3 in the 2016 FY results issued last January, does provide a breakdown of the "non-underlying" items and a breakdown of these. Share based payments are a large ongoing cost, but every individual investor needs to factor this into their respective valuation of the company.

In the interims they issued in July, non-underlying items were a lot smaller.

Regards,
Imran.

monzo

Just bear in mind Next (LON:NXT) usually under promise and over deliver. They are still a solid bellwether company with little debt and pretty decent margins. it's realistic to put out an uncertain outlook statement as we're about to embark on triggering brexit

Midnight25

Sales might be up at within John Lewis Partnership however profits are estimated to be quite a bit lower yr on yr. Expectations for profit before Partnership Bonus, tax and exceptionals for the year ending 30 January 2016 remains unchanged at between £270m and £320m versus £342.7m last year. Indicates they're being squeezed and that the market is tough for all retailers even the better ones. Think Next (LON:NXT) and others with large portfolio of retail outlets will have a tough year.

Paul Scott

5th Jan '17

Profuse apologies for me dropping a massive clanger on using the wrong year's figures for John Lewis. I followed a google link, but didn't double-check the dates unfortunately.

Anyway, I've removed that section, as it doesn't make any sense.

Thanks for those who pointed out my stupid cock up.

Regards, Paul.

FREng

The aely morning R4 Today programme covered car sales this morning (Thursday), saying that most new car sales were lease-purchase with a big (and unaffordable) "balloon payment" after 3 years if you wanted to own the car. Apparently most people roll over into an upgrade at that point as the most affordable option.

That feels unsustainable to me, and parhaps could lead to claims of mis-selling. R4 Today also said that consumer credit is at record levels, which will be a problem unless it can be inflated away.

How do car dealerships carry the asset of the leased car in their accounts? Does it get written down if the second-hand value after 3 years is less than the balloon payment?

gregatr0n

Re: Cambria Automobiles (LON:CAMB), read an article in FT yesterday where Mike Hawes, CEO of SMMT (Society of Motor Manufacturers and Traders), predicts a 5% decline in new car sales in 2017 due to the UK market having reached peak demand. Food for thought.

whitmad

I bought a second-hand car recently from one of these big, high-volume second-hand car dealers. They had a huge stock of second-hand BMW, Mercedes, VW & Audi all around 2-4 years old. Dozens of sales staff, constantly busy, very competitive pricing. The previous owner of the car I bought was a leasing company, I suspect most or all of their stock were ex-lease. I wonder, if the leasing trend continues, whether the traditional dealerships will find their supply of second-hand cars disappearing.

I'm keeping an eye on MOTR and will buy if they begin to show some momentum.

nigelo

PS writing from Nigeria with a dodgy american laptop so no pound symbol available :)

Techy aside:

To get the pound sign try holding down the Alt key and typing 0163 on the numeric keyboard. Alternatively you could copy and paste one from somewhere else.

Small Cap Value Report (4 Jan 2017) - NXT, BM, STAF, ACRL, SPSY, CAMB

Large cap retailers

John Lewis Partnership

Next (LON:NXT)

B&M

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Paul Scott

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