Small Cap Value Report (15 Sep 2016) - NXT, CRAW, FRP, IND
Good morning!
There are some interesting announcements from large retailers today. It's worth checking these, to see how overall market conditions are faring.
Next (LON:NXT)
Share price: 5040p (down 3.3% today)
No. shares: 147.3m
Market cap: £7,423.9m
Every time I look at results from Next (LON:NXT) it reminds me just what a high quality business this is. The profit margin is spectacular. What this means, is that even when trading deteriorates, the business remains very strongly profitable. This is an important point to grasp, because at the opposite end of the spectrum people often buy poor quality retailers because they are on a low PER. However, profits can quickly turn into losses for low margin, poor quality retailers, in a downturn. Whereas a super-high margin business like Next can sail through a downturn with the bulk of its profits intact, because its operating margin is so high at around 20%. Even if it were to drop to 16%, you would still have a very profitable company.
Next describes current trading as "challenging and volatile". It is adding lots of new space, and with such good ROCE and short payback times, this makes a lot of sense. Continued share buybacks drive up EPS, even when profit is flat, or slightly down.
There are a number of headwinds though;
- Struggling to recruit new customers for its credit offering.
- As with all retailers, the cumulative impact of Living Wage is likely to hurt.
- Rapidly growing online competition is relentlessly chipping away at the market share of traditional retailers.
- Weaker sterling means cost prices rising next year.
For these reasons I'm reluctant to buy shares in Next, although on a PER of about 10-11, it's very tempting. The trouble is, it's difficult to see much future upside on profits. So as a mature business whose profits may have arguably peaked, perhaps the price is right?
Generally, I'm keeping away from opening any new positions in conventional retailers. I think online is gathering momentum at such a rate, that it's starting to seriously disrupt the sector. Companies like Boohoo.Com (LON:BOO) can dramatically undercut the High Street on pricing. A younger generation is increasingly happy buying frequently & cheaply online, which presents massive problems for conventional retailers.
Crawshaw (LON:CRAW)
Share price: 44.5p (down 39.5% today)
No. shares: 78.9m
Market cap: £35.1m
Trading update (profit warning) - bad luck to holders here. The update today is rather worrisome. This small chain of butchers & hot food last reported on 29 Jun 2016 at its AGM. It said that LFL sales were down 1.9%, but margin was up. So the market gave it the benefit of the doubt.
Today's update sounds worse. It says;
...These factors persisted through to the end of the half year period, resulting in a further reduction in like for like sales for the half year, although this was partly mitigated again by a further strengthening of gross margin. We expect to report on our half year results on 29 September 2016.
The company has declined to give a LFL sales figure this time. That's a mistake, as when key information which has customarily been given is omitted, then the market just assumes the worst, and slams the share price down.
Crawshaws seems eligible for an award for maximum number of excuses given for disappointing performance. So far, in the last 2 updates, it has blamed weaker sales on;
- Softer footfall in Mar 2016
- Structural timing of Easter
- Impact of start of the international football championships (June)
- Adverse persistent weather
- Build up to the EU Referendum
- Customers being even more price focussed post Brexit
- Supermarkets very recently launching some aggressive meat promotions
The only one that rings true to me, is the last one. I've always maintained that competition from supermarkets is the big risk with this share. They're not going to sit back and let a smaller competitor eat their lunch. It's inevitable that the supermarkets will put the squeeze on emerging competition, if it takes away too much of their market share, as they are now doing.
Margins - Crawshaws says today that its strategy to focus on higher margin products has been a success. That is clearly untrue. What's actually happening, I believe, is that customers are drifting away to competitors, because Crawshaws is no longer as cheap as it was, relatively.
This point is confirmed by the company itself today, when it contradicts itself by admitting that it now has to lower prices to become more competitive again;
We are confident our actions can restore sales momentum, and we will be prepared to invest in margin to drive sales and sharpen our value proposition.
We are disappointed with current trading and clearly the outlook for the full year will depend upon the result of our actions, upon trading during the important peak winter and festive season, and upon the timing of our store openings.
It ducks the key point of whether results will be in line with expectations or not. That's another error. It strikes me as a deferred profit warning, and the share price is saying that Mr Market thinks so too.
Store roll out strategy - these comments today are perhaps the most worrying. It sends a signal that the existing strategy of opening new shops isn't working very well. That contradicts the whole underpinning of this share - namely that it's a simple roll out of a successful format.
Today's update sings the praises of factory outlet shops - in out of town locations with ample parking, and it sounds as if the company is now going to focus more on this type of site;
We are particularly pleased with our new standalone factory outlet store format, which significantly outperforms the high street format on every measure, as do our more established three mature outlets.
Fit out costs are lower per square foot, property and running costs are very low, EBITDA margins are excellent, and without a food to go element the operation is even simpler to roll out.
Added to that, being out of town with parking, and therefore more of a destination, factory outlet stores are not so dependent upon local footfall.
We are therefore currently reviewing our store roll out strategy with a view to adding more of these types of openings in our overall new store opening pipeline. We have one further site at an advanced stage, and another in the pipeline.
My former employer operated mainly from the High Street, but we also opened about 50 stores in factory outlet centres (having multiple stores in some centres). They were remarkably profitable, so I completely understand why Crawshaws is attracted to them. However, the best outlet centres are mostly focussed on fashion. I'm not sure that the centre owners would want a butchers in the middle of a centre that is trying to be all about aspirational fashion brands. So I reckon Crawshaws may struggle to find enough sites in factory outlet centres. There aren't that many outlet centres to choose from anyway, compared with High Streets.
My opinion - today's statement has clearly badly unsettled the market. A highly rated roll out cannot cast any doubts on its roll out potential, otherwise the whole reason for investing in the company is undermined.
I think the company has handled this badly, by not giving any specific figures today.
It's all about competition in my view. I reckon Crawshaws is now getting noticed by the big supermarkets, and they're taking action to grab market share back again. It's a highly competitive sector after all.
The excuses given by Crawshaws are really annoying. The timing of football matches, or a referendum doesn't suddenly trigger a wave of vegetarianism. The reality is that people are still buying meat, but from somewhere else.
What happens next depends on whether management can reassure the big shareholders to sit tight, or even support the share price with purchases? Also, the key question is whether the store roll out still makes sense? My understanding was that each site made about £200k profit contribution, therefore adding on new ones made obvious sense. Is that still the case? What is the sustainable level of profit for new sites? Will the company be scaling back its ambitious store opening programme? I don't know.
If the company can regain sales growth through keener pricing, then this might turn out to be just a blip. Although lower prices mean lower profit margins of course.
I think the valuation here got well ahead of reality. Having said that, the price has now reset to a more sensible level, so personally if I held, I'd probably sit tight now.
Incidentally, I have to comment on the sharp fall in price yesterday, just before today's profit warning. Clearly some insider dealing going on, which is depressing to see, and reflects very badly on the company itself. Confidential information on trading must not be allowed to leak out, otherwise it creates a false market.
Rumours on advfn are that someone's mate at Crawshaw's HQ told him before today's RNS, that LFL sales are down 5%. So that would explain the selling yesterday. However, it also means that head(s) need to roll at Crawshaw, to make sure that staff do not leak confidential information to their mates in future, if that is indeed what has happened.
Also, I think the company clearly needs to issue a fresh update, stating clearly what the LFL sales figures really are. It's not good enough to withhold that information just because it's deteriorated.
Fairpoint (LON:FRP)
Share price: 90.75p (down 12.3% today)
No. shares: 45.6m
Market cap: £41.4m
Interim results, 6m to 30 Jun 2016 - the key point with this group, is that its original business (debt management for consumers with financial problems) has been declining. To replace that lost business, it has been busy buying firms of solicitors. So it is now mainly a legal services group.
Figures today reflect that. The overall adjusted profit before tax is down slightly at £4.0m (H1 2015: £4.1m). However, this is now mainly generated by the legal services division, which made 78% of that profit, as opposed to only 34% of profit last time.
Adjusted basic EPS was down a little, at 7.03p (H1 2015: 7.38p).
The debt management business is being wound down now, blamed on regulatory changes announced on 20 Jul 2016, which have rendered it "unsustainable", which will incur £2.5m exceptional costs in H2, plus a £5.5m non-cash impairment charge. Perhaps this is not a bad thing - making the group easier to understand & value, with just one activity going forwards.
Webinar - 1:30pm on Monday - these are an excellent alternative to meeting management. The registration link is here. (sorry, I got the date wrong earlier, the webinar is Monday, not today!)
Net debt of £15.6m seems reasonable, so no particular concerns there. Also, this net debt should disappear over time, as the IVA book gradually turns into cash.
Interim dividend maintained at 2.45p. So if the final divi is also maintained at 4.35p, then the total payout would be 6.8p, providing a very attractive yield of 7.5%.
Outlook - a bit mixed;
· Majority of Legal Services trading in line with expectations
· As noted in May, conveyancing volumes impacted by slowdown in housing market transactions; impact of Brexit has led to fall in mortgage approvals to 15 month low
· As a result our expectations for conveyancing have been adjusted materially downwards
· Overall, the Group's performance in H2 likely to be similar to H1
· On track to deliver a simplified business model focused on legal services with a corresponding lower cost base, with DMP wind down as expected
Interesting comments above about conveyancing. It seems as if people are still keen to buy new houses (driven by Help To Buy), but sales of secondhand homes appear to be slowing. Note that conveyancing is only 8% of H1 revenues, so limited impact.
Valuation - the company says H2 should be similar to H1, therefore that implies about 14p adj. EPS for the full year.
Stockopedia currently shows 15.6p consensus forecast for the full year, so today's update implies a reduction of about 10% on that number. Not a disaster.
The PER is 6.5, based on a lower share price, and my lower estimate of 14p EPS this year. That looks good value to me.
My opinion - I've never been keen on the IVA activities, as it felt rather grubby - exploiting people who were in financial trouble, when there are debt management charities out there which do the same work for nothing.
I like the fixed fee approach which the legal services businesses are taking. So Fairpoint's expertise in streamlining processes through call centres, etc, should give it a competitive advantage over other firms of solicitors.
With a low PER, and a very good dividend yield, there is some attraction to this share in my view, so I'll probably pick up a few shares, if the webinar on Monday is reassuring.
Indigovision (LON:IND)
Share price: 150p (down 6.5% today)
No. shares: 7.6m
Market cap: £11.4m
(at the time of writing, I hold a long position in this share)
Interim results, 6m to 30 Jun 2016 - today's figures are in line with the trading update of 8 Jul 2016, which I reported on here. A few key numbers;
- Revenue $21.8m, down 3.5% on H1 2015.
- Operating loss of $275k (H1 2015: $1.26m). Although note that a favourable change in forex gains/(losses) accounts for about half the improvement (a swing of $468k).
- Excellent balance sheet, with net cash of $4.6m. This has been achieved by squeezing debtors and inventories down. So good cash generation in the period, despite lack of profits.
- Camera volumes sold up by 20%, but eroded by price deflation.
- Gross margin of 52.1% is good, and up slightly on last full year.
- Interim dividend passed, which is surprising given the cash pile is there to pay one. Currently expects to pay a final divi.
Outlook comments sound reasonably upbeat, although bear in mind that the company has limited visibility, and has disappointed many times before;
After a quiet start to 2016, the Group experienced an improving trend in financial results as the first half progressed.
The pipeline of large projects for the second half is stronger than the first half and, although market conditions remain highly competitive and the timing of a number of customer projects remains uncertain, the Group currently anticipates a satisfactory operating result for the year as a whole.
My opinion - it's still in the game, is launching plenty of new products, and is very well financed. So at such a low market cap, I'm a holder rather than a seller.
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52 comments
I hold FRP and am in for the long haul. I too am pleased they are less exposed to the "whiplash" business. I make the assumption that there is no sign that we are becoming a less litigious nation, nor any indication that civil law is likely to become less complicated over time. In addition, I can imagine that the implications of Brexit, hard or soft, will inevitably call for far more legal assistance for some years to come, including, sadly, assistance with debt. I also note that, within days of putting her South London house on the market, my daughter has shown six prospective buyers round. Looking simplistically at the graph and with Article 50 invocation looming, I may well add to my holding.
Fairpoint (LON:FRP) Press coverage states that a previous source of concern over group earnings may have gone away. seems the government have shelved a reform around minor motor accident injuries, specifically the operation of whiplash claims.
http://www.telegraph.co.uk/business/2016/10/13/delays-to-whiplash-reforms-costing-drivers-3m-a-day-insurers-cla/
I find the article illuminating, critical and well-balanced.
Regards Fairpoint (LON:FRP) they do seem pretty cheap but there legal services firm Simpson Millar has received *terrible* reviews online:
http://www.solicitor.info/solicitors/simpson-millar-llp/1645/1
and
http://www.mumsnet.com/Talk/property/1576553-Which-ONLINE-conveyancing-solicitors-have-you-used
(look at adda1 's review )
all since the acquisition by Fairpoint Group
I hold some of them (at a loss now) and was thinking about doubling down, but this makes me wonder how sustainable their business is.
Any people with legal expertise care to comment, Paul what are your thoughts about the relevance of online reviews as a signal for investment decisions?
I've held CRAW ever since I saw them at Mello a few years back. After this profit warning I decided to sell the lot. I think they have a results announcement out soon if you go by the timings of last year's RNSs and I don't want to take the chance of the shares tanking further.
Crawshaw is a textbook example of what happens to a share price when a stretched valuation meets bad news. It's been smashed.
Upon seeing the price fall I immediately thought to myself this may be a buying opportunity, but when I saw the total absence of figures and the stream of excuses in the RNS, I immediately thought "no way". Paul, I think you have let them off pretty lightly here - that's a shockingly poor bit of corporate communications which might well have made the impact of bad news worse. For me, it inspires no confidence in the management whatsoever. Anyway, best of luck to holders and buyers, but I am staying away from this one.
B2V
CRAW - the fact that they have such an experienced management team but yet release an RNS which does not give any numbers is a massive red flag as far as I am concerned.
If you don't know the facts, then your investment surely just becomes a gamble?
Hey johnrosier..
Forgive me, but I disagree with the weight that you put on the management of this company.
Experience is no guarantee of success, surely?!
We can all think of great managers e.g. Luke Johnson.
Yet the Board of Crawshaws and their 'experience' will not determine the eventual outcome for this company. The management may tweak the outcome, but ultimately the industry will be the arbiter:
For example:
Since when has Next been a " small cap ", trading at 5040 per share and turnover of 7.5 billion. surely there has to be other companies worthy of your scrutiny.
Steve,
I find Next (LON:NXT) is a useful bellwether for the retailing sector generally - since it's by far the best operator, in my opinion. Also its trading updates are amazingly detailed, and include lots of useful guidance which has read-across for other retailers (e.g. its comments about exchange rates recently have been useful).
You may have noticed that at the beginning of each report, I often comment on something macro-related, and occasionally something interesting from large caps. Then the rest of the report is on small caps.
Basically, if something is topical & interesting, then I'll write something about it. If that doesn't meet with your approval, then you can just move on to the next section.
Paul.
Wow. Good luck in life
tads
50 shops (say) x £100k = £5m
We then need to subtract central costs (say £1m) and pay tax on the remainder at circa 20%.
So, perhaps (£5m - £1m) x 0.8 gives profit after tax of £3.2m.
With 79m shares (the situation at the 2016 final results), that would be an EPS of circa 4p.
Obviously I am guessing most of the figures above but, even so, I doubt £100k profit per shop gives rise to an EPS of 6.3p.
HTH. Cheers, Martin
tads
Well the GBP/PLN exchange has certainly not been a thing of beauty over the last few months, if one is using sterling to buy Polish goods as per:
https://uk.finance.yahoo.com/q/bc?s=GBPPLN=X&t=1y&l=on&z=m&q=l&c=
But if that's the problem, the RNS should have stated that clearly not just identified (twice) the fact that UK shoppers were more price conscious following the referendum result, which is not the same point at all.
Paul,
I have a lot of respect for the management at Next (LON:NXT). They must be the best team in UK retail. But that spectacular profitability is based on their strong pricing discipline on very high margins. I fear their offering isn't different enough to continue to justify those margins. Trying to maintain that pricing just leaves the door open to the competition. They seem dependent on the old Next Directory catalogue shopping model which they were very successful with. But nowadays why get into a credit agreement to buy their products when you can get something affordable elsewhere?
Another outfit that seems to be struggling to adapt to the new environment is John Lewis based on their statement today.
Pauls comment about Crawshaw eating the supermarkets lunch made me laugh. Presumably it was the non vegetarian option !
Re: CRAW
The main problem with CRAW, except for those who bought in very early, has always been the high p/e. Stockopedia today puts it on a p/e of 245. Such a high p/e can be justified but only if absolutely everything goes right for quite a few years. And if not...
As you say, an update like this leaves the whole rational for investing in doubt.
And... Would you make an extra trip to buy your meat from a butcher, when you are already visiting your local Tesco, Sainsbury or Waitrose? I would go out of my way for something special - local farm produced, organic... - but not for a chain of butchers.
Re Crawshaw (LON:CRAW) yes I personally would buy my meat from a independent butcher and can't remember when I last bought meat from a supermarket, I don't trust where it comes from. My town here in Herefordshire (Bromyard pop 7,500 and not a wealthy demographic by any means) supports 4 butchers plus the Co-op selling meat.
For all the butchers it is not just the meat but the added value products (pies etc) that people go for and if you are going for a good quality pie you might as well buy your meat as well. I speak BTW as a vegetarian but I buy for my son and wife!!!
"yes I personally would buy my meat from a independent butcher and can't remember when I last bought meat from a supermarket, I don't trust where it comes from."
I think supermarkets probably have the most traceable supply chain, imo..
Does anyone like PURP? Today's trading sounds bullish:
Trading since the start of the new financial year on 1 May has been very encouraging, with little discernible impact following the EU referendum on the 23 June. For the period, UK instructions are up 121% year-on-year and have continued to grow month-on-month culminating in 3,156 instructions in August. Furthermore our market share versus online peers has strengthened to 65% at the start of September.
The recruitment of Local Property Experts (LPEs) is ahead of plan and on-course to deliver on our target of achieving 360 LPEs by April 2017. As at 14 September 2016 we have 300 LPEs recruited, an increase of 46% since 30 April 2016 when we last reported. We continue to roll out our share option scheme to our LPEs.
The launch of Purplebricks Australia in late August is progressing very well and has been executed on time and within budget. Early indications from the first two weeks are very encouraging, with the number of valuations substantially ahead of the UK business at the same point in its development.
The Company is well funded with over £28m of cash and is on course to meet the board's full year expectations, with the UK business moving into profitability this financial year.
Yeah - sounds bullish but omits important details like cash flow and cash position.
The company may eek a profit - but you can bet their cash burn will be huge.
Paul, Good write-up on Crawshaw (LON:CRAW).
Management have got some work to do to restore confidence in the growth story. They have a couple of weeks until interim results to 'polish' the story; the trading update seems a little hurried and does pose a number of questions.
The supermarkets may have been a little more competitive in there meat offering over the summer but I think its a bit early to suggest that this is in response to a £40m sales competitor with 40 odd stores. Management however seem to have been a little slow responding.
As an aside, clearly there was some "clever" selling yesterday; it's a pity no one told the new non-exec Ken McMeikan beforehe bought 180,000 shares at 83p in July!
For what it's worth, this was my conclusion to last year's full year results, written on 27th April 2016:
Conclusion: These are the first set of results under Noel Collett, who joined the company from Lidl UK last February and so far seems to be delivering to plan; 17 stores added last year and 15 planned for this. In the short term, as I have said many times over the last year, you cannot argue it is cheap but on a five/six year view I think there is a lot of upside as it heads towards its target of 200 stores plus, nationwide. On an enterprise value (market cap plus debt) to sales that should start to look more reasonable during the current year as another 15 stores are added. As I have laid out in previous posts, I think the shares could be 225p in 2021 (about +20% per annum from here) and today’s results do nothing to want me to revise that back of the envelope target. I am seeing the management tomorrow and will update my diary after wards. Happy Holder!
Following a meeting with management the next day, I concluded:
Conclusion: I know the story well and was pleased to hear it remains consistent with what I learnt at previous meetings. The management team are excellent: they are highly experienced, (Collett opened 76 stores in one year at Lidl), and highly incentivised and driven to build Crawshaw into a business with a national footprint. The question is how to value it? I like to keep it simple: in January 2024 it should have 224 stores, generating about £225m sales and £25m of annual cash flow. It does not seem unreasonable that the business would be valued at around £225m. That would require a 17% annual compound return from the share price over the next 8 years, starting from last night’s closing price. Of course there are risks, both to the upside and downside; it might struggle to achieve its target openings and the same returns with new stores as it currently is or to the upside, it might accelerate the pace of openings and achieve the target sooner.
So what to do now!
Clearly management credibility will be dented a little; more for the tone of today's statement than just having a poor few months trading.
There will be questions about whether there has to be a wholesale change in strategy or whether it just has to be tweaked a little.
The shares are off 44% as I write or 50% including yesterday's fall. (Some people are lucky with their timing!!!!). Since its high in November last year it is off 56%.
At 41p the market capitalisation is £35m. That looks cheap to me given forecast sales for next year of £67m, (although that may be subject to revision).
If this turns out to be a blip along the way to achieving its 225 stores in January 2024, then taking my back of the envelope January 2024 value of £225m, that would see around 30% compound annual appreciation from here.
Clearly, there will now be doubts that this is just a blip and the management will have its work cut out to restore confidence which will take time. The comparatives get easier as we move into the autumn as last October, November and December were pretty flat, so some better news for the "important peak winter and festive season" would help.
Although my confidence in the story and management has naturally taken a hit today,I think the share price reaction has been overdone, (many will be throwing in the towel day and moving on).
I think today is decent entry point even if they only get it half right from here.
I added to my existingholding this morning at 44.4p
John, you talk of the need for management to 'restore confidence in the growth story'. But in the history of UK retailing, has there ever been a retail roll-out premised on the initial core 40 stores delivering negative LFL sales growth?
Doesn't this suggest that Crawshaw's retail concept (in current form) isn't working & hence raises the question 'is the growth story dead in the water'?!
I asked Noel Collett at the AGM about the target of 200 shops....his response "why not 600". Was very impressed with him. It was Rose that was moaning on about Brexit...he is obviously a big Remainer.
Very disappointed with today's RNS. Handled very badly . I am a long term holder and have not sold any. There was always going to be bumps along the way. It is hard to believe that this is not a profitable business ...it's not long ago that we were told every shop is profitable from day one.
There are bumps and there is falling off the cliff! I wouldnt be rushing into Crawshaws, even at this level. I believe the share has further to drop until an RNS states otherwise.
I thought profit/trading warnings generally came in threes - just look at LAKE and FLYB, people talking on here of buying on the dips and recoveries and they just keep on going down and down with one negative announcement after another :-/
Doesn't it make more sense after a profit warning to wait to buy until after the company actually announces a shred of good news/hope?
Did anyone ask how exposed Crawshaw's are to the US$ rate?
The feed stuff used to rear the meat they sell are priced in dollars and it passes through to their input costs ultimately when the hedges in place at their chicken/beef suppliers expire. Same for frozen meat imports. Could be why Rose was moaning about brexit - the tanking of the pound rate against the dollar is bad news for them, total opposite of the benefit seen by the big dollar earners.
They buy from Poland and yes you are correct that was what Rose was moaning about. He did stop the meeting and asked the assembled shareholders if they thought the electorate knew what they were voting about.
Their gross margins are coming under pressure from both sides then - cost inflation from the tanking pound and the price reductions Paul highlighted above to attract back the shoppers that have left them. Could well be painful given the nature of their other costs are pretty fixed - shop rents, rates etc.
Happy to be shot down with this and told where I'm going wrong.
If they are no longer making £200.000 per unit and are only making £100,000 per unit . Assume they stop opening new units and operate as a stand alone business. That would give us an eps of 6.3p. With a share price of 41p that gives us a P/E of 6.5.
From the latest accounts on here, the gross margin was £16.7m which led to an operating loss of 0.4m. If that margin takes a 10% hit which does'nt seem an unreasonable assumption given the fall in the pound/price cuts needed to attract back customers that's a c£1.7m hit which increases the losses.
Where are you getting the figures per unit from and what do they represent? Suspect it may be contribution and not profit.
From Paul.My understanding was that each site made about £200k profit contribution,
You are probably right.
I get your logic tads ('what is the base level of profitability if they stop new openings?'), but I don't think the right starting number is £200K profit per store.
In the last financial year they achieved operating cash-flow of £1.87million from 39 stores i.e. £48K per store.
So still highly rated.. even as an ex-growth stand-alone business.
Thanks John for your thoughts on Crawshaw (LON:CRAW) and of course yours as well Paul. I bought these with a 3 to 5 year (or even longer view) and I am going to stick firm and indeed have topped up twice today. Once at the open (order placed over night) at 48p and once this afternoon at 44.45p.
It takes time to build a business and mistakes get learned from along the way. As you say it depends on the roll out and whether that continues.
Additionally Rose has skin in the game (a 7% holding) so he will not want to see it fail. It would be nice to see Noel Collett do some buying at this level as he appears to have no interest at the moment.
Hi Purpleski,
I've found that it is usually a mistake to immediately average down on an existing holding after a profit warning. Although we always deny it, the psychological factors driving such a decision tend to be;
- anchoring to the previous share price, and not allowing for the fact that things have changed for the worse, and
- a subconscious desire to support the share price, and willing other people to do the same (groupthink on bulletin boards, where people strenuously support the company despite the bad news).
Having said that, as a non-holder of Crawshaw (LON:CRAW) at the beginning of the day, I gradually warmed to the idea of picking up a few by the end of the day. If the LFL drop is indeed 5%, as rumoured, then that's fixable. It doesn't necessarily mean that the wheels have come off.
The mistake they made in today's RNS is to imply that the High Street new store openings are not very viable any more. I don't think they meant to say that, but the emphasis on factory outlet centres gave that impression.
So I suspect that management will be busy on the phones & in meetings, reassuring big shareholders that everything is going to be fine. If the big shareholders buy that explanation, and the next set of numbers aren't too bad, then I could see sentiment gradually recover for this share over the autumn.
Regards, Paul.
Hi Paul
Thanks you so much for taking the time to reply personally about Crawshaw (LON:CRAW) . Your points are really helpful and I will add them to my investing checklist. You have made these points before and they are very valid and I was aware of them when I made the purchase this afternoon which I may regret. But felt with a fall like this I could only do one of two things exit or top up. I felt doing nothing was not an option (this was something I cottoned on to after reading The Art of Execution).
Your first point I agree with entirely and I am probably guilty of that here but the second one I am not sure applies in my case.
I shall watch the share very carefully over the next few months but am prepared to give the stock plenty of time. Now 2.9% of portfolio so I think the exposure is manageable.
Thanks as always for the great reports, I lean as much from them now as I did when I first started reading them.
Why would you invest in something that requires you to forecast out to 2024 in order to justify potential returns - this is a small, niche butchers chain. Valuation always looked stretched here and still looks the case now
After a day like today I can see your point!
However, I don't think you need to look out to 2024 to justify buying it. That was just an illustration of what it could be worth then. It might of course be worth less or if the potential store opening programme is extended past 200 odd stores then more.
Clearly it has hit a bump on the road and hopefully only a bump. I have confidence in the management which was why I was happy to add today. Obviously I would rather have gone in to today with a smaller holding but I didn't!
Not for me but all the best with it.
I would question though how much faith can an investor have now in the CEO; as a public company CEO he is quite inexperienced. He may have done great at Lidl as part of a well oiled machine but Crawshaw is a far different proposition. The extract below from today's RNS would seem to indicate that part of the problems are to a certain extent self-inflicted e.g. Crawshaw (I presume the CEO decided this strategy) was actively positioning itself at higher price points - clearly this did not work and I don't accept Brexit as an excuse as the UK retail sector has been cut throat for years now so consumers seeking out good/best value in their shopping habits is an established trend.
"Over the last year or so we have actively sought to rationalise range, reduce the number of price-led promotions and drive higher margin lines, and the strategy has worked well. However, with our customers now being even more price focussed post Brexit, and with the supermarkets very recently launching some aggressive meat promotions, we are reacting to ensure we maintain the value-led approach that has proved successful in the past. This includes introducing more local choice and lower price point packs. "
Clearly they took their eye off the ball but I think will rectify the situation. Luckily in the shower term the comparatives going into the autumn/winter are much easier. They have flexed the gross margin too far and I think lost some of its value proposition. I think like-for-likes will recover, the obvious question is at what cost to margin.
With an experienced Chairman in Richard Rose and with the recent appointment of Ken McMeikan as a Non-Executive Director they have a strong and experienced Board, which I'm sure will give wise counsel.
McMeikan is currently Group CEO of the Brakes Group, a position he has held since 2013. Prior to this, Ken was Group CEO of Greggs Plc, the UK's leading bakery food-on-the-go retailer, a position he held from 2008-2013. Additionally, Ken has a combined 18 years of senior retail experience with both Tesco and Sainsbury's.
"aggressive meat promotions" that sounds very scary!
Line of the day by Paul:
"a referendum doesn't suddenly trigger a wave of vegetarianism"
Brilliant!
Crawshaw (LON:CRAW) - Disappointing to see an experienced Chmn like Richard Rose & ex-LIDL CEO issue an RNS that doesn't ring true.
Would have to be much cheaper for me to buy now.
Ricardo (LON:RCDO) are up 10% on strong full year results today.
I gave in to the temptation you resisted in July and bought a few to tuck away so thanks for highlighting them.
Morning Paul.
Thanks for the thorough and timely write up on both Crawshaw (LON:CRAW) and Next (LON:NXT) . Good to see it out so early given the volatility in the two stocks covered. Personally, I didn't think the Next report was too bad - as ever the quality of the information is spot on and I've got used to the rather dour tone of their headline summaries; since the headline is what tends to be reported by the likes of the BBC business coverage, there seems to be a pattern of immediate sell off then claw back on due reflection of the numbers. One big plus seems to be the strength of their online offering if this is the way fashion retailing in the UK is headed.
On Crawshaw (LON:CRAW) not sure what to make of the release, other than it reads like a piece of homework dashed off by someone on the bus on the way into school without too much care or attention. I sense maybe it had to be rushed out early because of news leaking to the market yesterday afternoon. Glass half empty says they're clutching at straws to find excuses for a broken business model. Glass half full says they're on the ball and are adapting the model to continue recent growth success. Falling knife or a bargain?
I've been watching the stock for a while but been put off by the very high premium. For better or worse, I've given management the benefit of the doubt and taken an entry position this morning at a c.50% discount to the price this time last week.
Best,
Gus.
Paul,
I'm surprised that you didn't cover GFRD results yesterday considering your coverage post-Brexit and purchase therein.
Andrea
Andrea,
Re Galliford Try (LON:GFRD) - I only cover large caps by exception, if there's something particularly topical going on. Plus of course retailers, as that's my sector specialism.
So just because I've mentioned something here once, doesn't mean that I'll necessarily mention it again.
Each day I skim through lots of RNSs, then pick ones to write about here that I think look the most interesting/topical, and which have most potential upside, or downside risk.
I always try cover small cap profit warnings, so we can all learn from them, and identify any read-across to other stuff in our portfolios.
My general theme of buying bombed out housebuilders after Brexit has been very successful, but personally I've moved on now. Other fish to fry!
Regards, Paul.
Paul, I see Fairpoint (LON:FRP) half year report is out today, they report slowdown in housing market and mortgagees.
I think that's the blame for the fall in SP today isn't it? (All the other bad news was known before as far as I can make out). Personally I am not worried about the fall in conveyancing business as I think that will be short-term.
Sometimes I come across something that I feel is important but don't have the where-with-all to grasp it and apply the knowledge elsewhere. That is where I am with Next (LON:NXT). In their PDF version (graphics etc) http://www.rns-pdf.londonstockexchange.com/rns/8845J_1-2016-9-14.pdf a great deal of useful information is presented especially relating to the online business development and currency exchange rate effect (pages 12-16).
Overall it gives me the impression that they have finally woken up to how important this is but because they are so late to the party their experience has left them short on what exactly to do and how to implement it. At times it reads they are a bit lost and not in total control. Whereas the likes of Boohoo.Com (LON:BOO) appear to have that side of the business banged to rights and Boohoo are concentrating on scaling the business up.
These results from Next provide confidence that it is the likes of Boohoo who are the better investment (in terms of share price) over the next 2-5 years.
I wonder if 2016/17 will be looked upon in years to come as confirmation that high street fashion shops are going the way of traditional butchers ;-)
Paul, Could you ask all your readers to phone the FCA and complain when a pre announcement price move like Crawshaw's points to insider dealing. The number is ......... "Call us on 0800 111 6768 (freephone) or 0300 500 8082 from the UK, or +44 207 066 1000 from abroad. We are open Monday to Friday, 8am to 6pm and Saturday 9am to 1pm." It is only pressure from us that will get them off their backsides!
Or email market.abuse@fca.org.uk
Paul, I wonder whether you have noticed the results from the newly listed Franchise Brands (FRAN). This is an interesting company mostly because of the team running the show- Nigel Wray and the team that developed Dominos Pizza into a giant franchise.
They have now listed this business that runs 3 separate cleaning and repair franchises that seem to be growing very nicely with EPS growth of 18%, net in cash, and even with this growth has a PER of c16.8. No dividends yet, but has promised an announcement on their first dividend in the coming months.
The calibre of the team is what makes this particularly interesting IMHO and the relatively undemanding PER for a quality growing business.
Declaration: I hold FRAN