An analysis of Laura Ashley

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 a business where the management do not even know what their customers will want next year is far more likely to make serious mistakes than one that does.

The Business Model

So it is for the above reason that I usually ignore fashion companies but Laura Ashley, as touched on before, appears to have something a little bit different.  It has created a small niche for itself within the UK market through establishing a recognisable and distinct style and brand name.  While I think this strategy will forever limit the maximum size of the business (not everyone wants Laura Ashley), it appears to have succeeded in providing more consistent sales and profits which appeals to me greatly as an investor.  While I am no fashionista, I am able to understand that there is consistent demand for the products, and this is substantiated by the company’s revenue and the dividends it pays.

The business has performed a similar trick with it’s furniture and home accessories divisions, with all products being distinctly in the Laura Ashley style to appeal to its target market.  While still not my favourite sector, I much prefer this side of the business as I think that the industry is a little more predictable – thankfully it represents the majority of sales.  Further supporting this part of the business are the two hotels that Laura Ashley is now involved with.  The hotels are Laura Ashley branded and all the furniture in the hotels is supplied by Laura Ashley; the hotels therefore act as show rooms in addition to providing an extra couple of million pounds in revenue which is quite a neat idea I think.

Finally, international operations have been successful to date, although there is certainly further room for growth here.  As has been evidenced by the relative success in Japan, there is demand for British designs in some parts of Asia, particularly where the middle class is growing rapidly.  I would argue that the predominantly Malaysian shareholders are well aware of this and there may be some welcome expansion in the region over the years to come.

Recent Concerns

The company recently announced that it was buying a ~ £31.1m property in Singapore, which came as a surprise to many investors and prompted a dramatic 10% fall in the share price.  I have read both positive and negative speculation regarding the decision, and am still unsure as to what the true motivation behind the move was.

If the purchase was the result of a simple capital budgeting decision, and it was determined that with current interest rates it would be cheaper to buy a property instead of renting one, then the move could prove sensible in the long run.

If the purchase was a speculative one, and the management team made the purchase simply with the intent of leasing the property out or turning a profit on its sale, then I would argue that this is not a responsible use of shareholder’s funds.

Alternatively, the deal could potentially be seen as cover for fraudulent behavior of some kind and the office space does seem large for a company that is generating the vast majority of it’s revenue in the UK.

With current information, the picture is not at all clear so I will have to do a bit more work before making a decision.  We have now seen, with this transaction, that the management team and majority shareholders are happy to do as they wish without prior warning.  Therefore, should we invest, it is vital to try and understand their incentives to avoid a scenario where unfavourable action is taken without warning, leaving us nursing losses.

Concluding Thoughts

Overall, I like the company and am impressed by it’s consistent revenue and dividends.  The dividend yield alone, at 6.72%, is one of the best out there and offers attractive returns by itself.  Other sources of gains could be any growth in earnings or book value, assuming the business is successful in expanding further overseas, and any increase in the earnings multiple from it’s relatively low current position.

Potential agency issues, however, are a big concern for me and I will have to conduct additional research to obtain an understanding of the real intentions of the directors and majority shareholders, in addition to my usual analysis.

Hope you enjoyed the article, if so then please share it with your network and feel free to leave any comments or questions below!

At the time of writing I do not hold a position in Laura Ashley Holdings – LON:ALY

It is important to note that all opinions expressed in this piece are the opinion of the author only and do not, in any way, constitute investment advice.  Any individual seeking to make investments of any kind should conduct thorough proprietary research so as to fully understand the risks they are taking.