Small Cap Value Report - Thu 7 Mar 2019 - QUIZ, AIEA

Guten Tag, it's Paul here, with the placeholder :-)

My daily excuse about not getting around to doing the RBG notes has to continue.

I was busy yesterday afternoon, preoccupied, raising awareness of ZANE, my favourite charity.  It's very vivid in my mind, having just spent some time in Zimbabwe.

All I can say is;

"These are the things, these are the things, the things that dreams are made of!" - everyone likes a bit of Human League. 

On to today's news...

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QUIZ (LON:QUIZ)

Share price: 14.75p (down 54% today, at 11:44)
No. shares: 124.2m
Market cap: £18.3m

Trading update (profit warning)

QUIZ, the omni-channel fashion brand, announces an update on trading during the period between 1 January 2019 to 28 February 2019 ("the Period") and its expectations for the financial year ended 31 March 2019 ("FY 2019").

Yet another disappointing update from this online & physical clothing retailer. It's one of these shares that seems to be on permanent ratchet downwards, with each profit warning smashing up the share price further. There was a nice rebound here, for traders, when it last bottomed out at c.20p, then (temporarily) bouncing to a peak of about 36p. Here we are today at just under 15p, which would have been unthinkable not long ago. Is it value now? Probably yes, but I'll crunch the numbers first.

During the Period, the uncertain consumer spending backdrop has remained challenging for QUIZ. As a result, the Group has recorded a significant shortfall in sales compared to the Board's prior expectations. Furthermore, there has been a requirement to apply higher than anticipated discounts to clear excess stock.

This sounds like management are in denial. When sales fall significantly below forecast, and they have to discount to clear stock, it means they got the fashions wrong. Simple as that. The first step to fixing that problem, is to admit it, which QUIZ doesn't seem to have done.

Online sales are up 16.2% - not bad

Physical stores (and concessions, which are mainly in Debenhams stores) are down a thumping 11.1%. Combine that with lower gross margins (to clear dud stock), and the fixed cost base of physical stores, and this will have a painful geared impact on the bottom line.

Previous guidance was as follows;

The Board previously anticipated that revenues for FY 2019 would be approximately £133.0m, which would have represented growth in sales in the final quarter of 9.2% compared to the previous year resulting in anticipated EBITDA* of £8.2m.

New guidance today;

Given the significant shortfall in sales experienced in the final quarter of FY 2019 to date, and should this trend continue throughout March 2019, the Group anticipates revenues for FY 2019 to now be approximately £129.0m.

It is also expected that the increased level of discounting will have a material impact on gross margins generated in the final quarter of FY 2019.

The Board now anticipates that the Group's EBITDA* will be approximately £4.5m for FY 2019.

It's still profitable on an EBITDA basis, so not a complete disaster.

Broker comments today are negative, as you would expect.

Balance sheet - is strong, so I don't see any risk of QUIZ going bust. Also, it has very short leases on its physical stores, so we can expect to see it jettisoning loss-making stores quickly & easily over the next couple of years - providing potential upside. The concessions in Debenhams are likely to be slashed, due to DEB's own store closure plans. I've mentioned before the bad debt risk, if DEB goes bust, which I estimate could be up to c.£4m - a significant risk.

My opinion - obviously this share has been an incredible disappointment, since floating in July 2017. It's now clear that the selling shareholders took advantage of an unsustainable period of good trading, to line their own pockets, in what is now clearly seen as an over-priced IPO.

However, everything has its price, and I think £18m mkt cap for a cash-rich, still-profitable fashion chain, with strong online trading, looks far too cheap. I don't think it's likely to go bust, due to the balance sheet & strength, and short leases.

A major sort-out is needed here. So divis are almost certainly likely to be cut, or abandoned altogether, and there are likely to be plenty of store closures, to restore profitability. I think deep head office cuts are probably also needed. Unfortunately, the company beefed up its central costs, anticipating expansion.

Overall then, a dismal situation, but it looks recoverable. Management are experienced rag traders, and should be able to turn this around. I don't see any read-across for other retailers, online or physical. As one broker comments today, the problems here look home-grown. Fashion is highly competitive, and the fashions have been to be spot-on, and priced attractively, to persuade shoppers to part with their money. Especially when footfall in towns & cities is relentlessly falling, as more sales move online. Maybe QUIZ should focus entirely online, and dump all its physical stores?

At 15p I think this one is priced for armageddon, yet it looks a survivable, and recoverable position. So I'll probably be catching this falling knife at some point.

Amazingly, it has fallen over 90% since July last year. To me that looks a considerable over-reaction. We've seen with Superdry (LON:SDRY) and Footasylum (LON:FOOT) that considerable rebounds can happen, once investors become overly pessimistic after profit warnings.

I don't see any read-across to other companies from today's warning. QUIZ is a fairly weak brand, and it got the product wrong. That doesn't have anything to do with macro factors, in my opinion.

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Airea (LON:AIEA)

Share price: 70p (down 5% today, at 12:22)
No. shares: 41.4m
Market cap: £29.0m

(at the time of writing, I hold a long position in this share)

Preliminary results

A very quick skim of these figures, as I have to dash for a meeting shortly.

These numbers look OK.

Prior period comparatives are 18 months, due to change of year end

Revaluation gain on property boosted profit by £250k

Negative tax charge of £785k boosts EPS - this needs to be adjusted out, as presumably a one-off

Strong balance sheet, with net cash - but note the £3.7m pension deficit

Lack of broker forecasts, so difficult to value this share

Generous divis

Outlook comments sound positive;

The changes made to the business and the increased investment in our successful commercial flooring business provides significant opportunities for profitable growth. Further investment in new products will continue throughout 2019 maintaining our confidence in the future prospects of the business, the ongoing improvement in the performance of the commercial floorcoverings business, and the cash this business continues to generate.

If approved, a final dividend of 2.0p per share will be paid on 22 May 2019 to shareholders on the register at close of business on 12 April 2019, with an ex-dividend date of 11 April 2019.

My opinion - I'll go through the numbers in more detail later, but for now I've seen enough to make me comfortable to continue to hold. This share has been a welcome, but unfortunately all too rare, strong performed in my portfolio.