An Analysis Of Laura Ashley

8th Jul '15 by Tom Firth

7 comments 13098 reads

Laura Ashley (ALY) has been catching my eye on a number of screens for a good while now and I have finally decided to have a closer look. The company, at first glance, appears to be modestly valued, is paying generous dividends and has excellent returns on capital; all characteristics I look for in a business. While the business is involved in fashion and retail, which are generally industries that I dislike, there is clearly something about Laura Ashley that allows it more consistent revenues and returns on capital than its average competitor.

Screen Summary:

At a PE ratio of 11.9x, the business appears to be trading cheaply relative to earnings.
A PS ratio of 0.72 confirms this further.
The return on capital of 39% is fantastic, and while the operating margin of 8% is less so, it is still good for the industry.
The PB ratio of 4.93x is very high, but once you consider that most of earnings are paid out as dividends, and therefore that little is taken to retained earnings, this makes a bit more sense.

Company Background

Laura Ashley began operating in the mid 1950’s and has since grown to be a well known and respected brand that is popular throughout the UK. In addition to fashion, where the company’s roots lie, Laura Ashley has spread out and their divisions now include furniture, home accessories and decorating. In fact, fashion currently makes up only about 17% of UK revenue, with a further 60% coming from furniture and home accessories combined, and the remainder belonging to decorating.

In addition to broadening its operations in the UK, the business has also grown overseas, with franchise operations all over the world currently generating around 10% of group sales. Efforts have been made to improve the company’s online presence too, with 17.8% of UK sales now coming from online sales.

The Market

The fashion industry is one that I intuitively am not very comfortable with, largely because I do not understand it. For example, if you were to show me two dresses, I would be totally unable to predict which would sell and which would not. A fundamental rule I follow is that if I don’t understand the product and why it sells, then I won’t invest – I know that dresses seem simple but don’t be fooled.

I suppose I believe that the companies themselves have a hard time making such predictions, and I just feel that…

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janebolacha

8th Jul '15

Tom, I know that international expansion via franchising is the route the directors of ALY seem to have embarked on but is it really proving to be successful?

This is from their latest accounts:

"International Operations

Generating 10.3% of total Group revenue, our international Franchising operations are a very important part of our business and, as at 31 January 2015, there were 303 (2014: 286) franchised stores in 30 territories worldwide. Further franchise agreements are expected to be signed later this year.

In spite of overall store growth, franchise revenues fell by 1.5% to £27.8 million over the year. This was largely due to a weaker Japanese economy and the challenges facing some mainland European economies.

Licensing income increased by 3.0% to £3.4 million reflecting good levels of organic growth amongst a stable Licensee base. Several new License agreements are expected to be approved during the current year."

Number of international franchised stores up by 6% but revenues from them down by 1.5%?
This needs further thought, imo.

Tom Firth

Hi Jane,

Thanks for your comments - I have read the accounts and agree with everything you have said and I appreciate the balance as always. Certainly, at the current point in time, the business is not a fast growing one and hasn't been for a long time. UK operations in particular are undoubtedly mature and unlikely to grow significantly I think.

What interests me most about the opportunity is not that growth is guaranteed, however, but that the security may be priced at a level that provides downside protection in addition to the possibility of a growth scenario going forwards.

If you were to hold the shares from the current price, and assuming the current dividend is sustainable, then the dividend yield in and of itself will provide quite a satisfactory return. Add to this a potential growth scenario, and you have what may be a good investment case.

As Mohnish Pabrai likes to say, it could be a "heads I win, tails I don't lose much" type of situation. The chance for capital gains come from the possibility of growth, while income from the stable, mature UK business would protect to the downside.

Of course, I have yet to perform a valuation myself to gain further comfort over the current price. Additionally, I have not done significant work on the sustainability of cash flows for dividends. These would be the critical questions to answer I feel for the investment thesis I've outlined here.

What are you thoughts on this? Out of interest, do you have any opinions on the recent property acquisition too?

Have a good day for now,

Tom

Tom, I view different shares as being competitors for my money and go with those I find fundamentally convincing as businesses and as managements, perhaps irrespective of what may well be momentary snapshots of their finances and results (although I tend towards the classic "growth and value" stock but only, only after having done my "business and management" exercise).

I have doubts over the experience, capacity and capability of MUIB, the 40% Malaysian shareholder now effectively running the business, to implement a major expansion of the international franchising business. The last results seem to demonstrate that the Laura Ashley brand is far from being resistant to general economic turndowns in individual countries in Asia. In addition, I fear that they are coming to the party in China really very late indeed, perhaps just when the punchbowl is being taken away. India, well perhaps, but do they or MUIB have any ideas about that particular market that would bring success?

I don't understand the Singapore property purchase which seems to have been presented as somehow necessary to achieve this expansion ambition in Asia. We're talking of a franchising operation, remember. Why would a property of this size, costing (with fees) close to £35m, be needed to administer the Asian end of a pure franchising operation? It presumably would not be an intermediate warehouse, businesses don't work that way these days. So why? A few commercial and admin staff, perhaps but no more. No answers why.

The UK end of the business has recovered over the last few years. I can understand ALY thinking, well, what's next? Their strategy does not convince.

Excellent, thanks for the response again. I view shares in a fairly similar way to you but I like your competitor analogy, haven't phrased it quite like that to myself before! In particular, I am with you 100% on the necessity of understanding and evaluating a business's strategy in order to determine the sustainability of current earnings and the likelihood of future growth. As an auditor by trade I am perpetually reviewing accounts a year in arrears and have seen all too many times how recent results are not indicative of future performance.

I have nothing to add on MUIB at this point as I don't know much about them - I will do my homework and get back to you on that one or try to address it in a later piece of analysis.

Yes, the property transaction is odd and I agree with your logic, it doesn't quite add up in my eyes either. Further work is also required on this before any kind of decision can be made. I do feel that it is better to be safe than sorry though and unless some transparency is brought to bear on the situation I think I will just have to give this one a miss.

The only point I have to add/emphasise is that I don't think the business requires enormous growth to represent a good investment opportunity - I am viewing the potential for growth internationally as a real option thrown in with the rest of the deal. If the UK business continues as it has done and keeps paying out the current dividends, then simply the dividend yield is appealing.

Further, if the UK business is undervalued (and please note that I haven't done the work on this point yet beyond reviewing earnings multiples), then simply the market recognising the fair value of the UK business could provide satisfactory capital gains in addition to the dividends. However, if the company do pursue an ineffective international growth strategy (as you fear they will), then I do think that the UK business would suffer as a result.

Tom, thank you.
I look forward to reading your further analysis.

You might be interested in this case study paper on Laura Ashley,
mostly covering the 1990's but giving some background
into how MUIB came to be involved in Laura Ashley:

https://www.blackwellpublishing.com/KOLB/downloads/private/grant/lauraashley.pdf

It's a management paper, rather than strictly a "figures" one but I found much that is relevant still to Laura Ashley today.

As a kind of outsider, not having lived in UK for quite some time,
I tend to be fortunately detached from "brands" that are within the UK experience
and so perhaps I look at companies such as Laura Ashley in a different way.
In that paper, I was struck by the fact that their annual turnover has been in the range
of £250m-350m for the last twenty-five years! So I question the real growth value within
the name and the brand internationally. That paper also refers to failed overseas
expansion in North America (which would, one would think, be just the market
for such a quintessentially British brand).

Good luck with your investing,
Jane.

That looks like a good read, thanks for the link and I will be sure to have a look as soon as I can. If revenue has been stuck in that kind of range for so long then I certainly don't view that as a positive - I was aware it had been quite stagnant for a number of years but 25 is something else altogether!

It's interesting what you say about not having lived in the UK for some time, I don't view myself as being enamoured with the Laura Ashley brand by any means (I've never bought a product), but the fact that I am British, have seen the shops and am aware of its presence quite possibly does have some psychological influence on my decision making.

Ben Graham put it far better than I ever could: "The investor's chief problem - even his worst enemy - is likely to be himself."

Good luck to you too,

Tom

hawkipa

9th Jul '15

Good article and very much enjoyed hearing your thoughts Jane. I look forward to seeing your further analysis Tom.

An analysis of Laura Ashley

Screen Summary:

Company Background

The Market

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About the Author

Tom Firth

7 comments

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