Small Cap Dog of the Day QUIZ

Quiz (LON:QUIZ) - Magical Profit after 72% fall in sales, Wow is that possible?

Update 26th Jan2021

Quiz (LON:QUIZ) announced Interim results declaring a promising profit, even though sales dropped 72%. Wow, how do you do that?

Well, the profit came from a 'Non-cash gain of £16.2 million arising on the administration of a subsidiary undertaken in the Period'. i.e the CVA allows the company to declare a profit by not paying its debt. Note this Non -Cash hence has no effect on cash flow. With Covid-19 continuing and events likely to be subdued for the seeable future Quiz (LON:QUIZ) still looks like a poor investment going forward. (see Graph below).

The model was updated today to take account of the CVA and new sales level. As the graph shows the profit is illusionary (purple line), EPV valuation based on cash flow (blue line ) shows the real picture.

Company performance continues to deteriorate, and this is just uninvestable. (more information below from previous up-dates).

As always DYOR and decide for yourself.

BSV

Updated 16th Sept 2020.

I was keen to understand how turnover rents affect valuations and I've tried to model Quiz (LON:QUIZ) below for illustrative purposes.

I found a useful article from fashion united which provides some detailed information. I included a link below that highlights what a contract might look like.

'The typical minimum base rent is around 75-80 percent of the total. The turnover payment element represents a percentage of the total turnover, usually between 5 and 12 percent; however, the mix can be tailored to suit both parties by negotiation. Typically, a retailer will want to increase the turnover rent element. (8 May 2020) .' (from fashion united).

https://fashionunited.uk/news/....

This probably does work well for a successful retailer, but not for a company like £QUIZ.

£23M of lease liability in 2019 with an average lease length of 26months. (£10.6M yearly rents)

So if we apply for some middle number base rent of 77.5%, and 8.5% of UK retail turnover

We get a base rent of £17.82M (base rent ) plus £7.64M (turnover rent, based on £89.8M retail turnover for 2019). This works out 25.46M for 26 months, or £11.75M yearly rent if sales recover to a previous level.

So no real reduction in rent as far as I can see, although it does help if revenues fall during another covid-19 shutdown. As the business has shut down a number of stores UK and internationally the rent will fall, but so will revenues supporting the cost structure.

My model still predicts negative cashflow even with a recovery of sales!

The CVA has extended the life of the company, not improved company management, its cost base, or its market proposition to the consumer.

DYOR

9th Sept 2020 ( current price 8p)

The retailer's IPO's placing price of 161p, before rasing to 207p high in 2018. It comes crashing down since to a 5p low in 2020. (I have no position)

Having reopened some stores and renegotiate rents within a pre-packed administration of the physical retail part of its business are things likely to improve?

Well, rents have come down and stores have been closed reducing overall costs. Rents are more aligned with sales within the physical stores, which must be good for future profitability.

Still concerning is the drop off in sales in physical sales (-89%), and online sales (-54%). Even in August Online sales are -11% low than the previous year. One would have expected online sales to be strongest in the current environment. With the gross margin declining by 6%, I can only conclude their core offering to the consumer is poor and competition too strong for this business to develop a meaningful recovery.

Sales profile 2019-2025

The Model below does show a 5p fair value (base on NTAV) for the company.

Possibly the company could recover sales more strongly, but QUIZ needs to demonstrate they have a consumer-relevant offer that does not need so much discounting. There are better management teams and companies worth looking at in the market so this needs to join the barge pole list for now.

As always do your own research. (DYOR)

BSV