Good morning, let's take a look at:
Not sure if there is anything else worth covering. I might just add a few thoughts on IFRS 16.
QUIZ (LON:QUIZ)
- Share price: 16.18p (-3%)
- No. of shares: 124 million
- Market cap: £20 million
Trading at Quiz is "broadly in line with the Board's expectations against the backdrop of a difficult UK retail environment".
This means a slight miss against expectations.
Revenue is down 5% in H1, with flat gross margin.
Online revenue is flat, but the company provides an adjusted measure which says that online revenues grew:
Online revenues grew by 7% to £20.0m (HI 2019: £18.7m), once adjusted for unprofitable revenue streams terminated during the year. Total online revenues in the previous period were £20.0m, consistent with the current year.
Store sales growth, unsurprisingly, is very poor, but at least the second derivative is ok!
Sales in the Group's UK standalone stores and concessions decreased by 11% to £31.3m in H1 2020 (H1 2019: £35.1m). The rate of decline experienced has reduced in recent weeks.
It would be nice to have clarity on whether we can use this 11% decline as a like-for-like figure.
Lease length is reported to come in at an average of 26 months, unchanged versus what the company reported in June. "Actively managing" its lease renewals is a key element of its turnaround plans.
International sales (comprising Ireland, Spain and other countries) are up 3% despite declining sales in Ireland.
Net cash is £7.1 million and cost savings of £2 million - £3 million are being pursued
My view
I still can't get over the speed and the scale of the collapse in valuation. This IPO'd at 161p a little over two years ago.
Full-year results to March 2019 confirmed that profitability had all but disappeared. Quiz reported £4 million of EBITDA and a small positive underlying PBT, but the actual PBT was only around breakeven.
With sales declining by 11% on the UK High Street, I would expect a significant deterioration in PBT in the current year.
The short average lease length offers some hope that the company can find a way out of its predicament, but this is far from guaranteed.
With high street retailers in general, I think they need to have a radical plan for how they will close all of their stores, if it becomes necessary to do so. I own shares in Next (LON:NXT) because they have been working on that plan for years. I don't own shares in any other national retailer, because I fear that they don't or can't.
The £7 million cash pile at Quiz will help to pay for some restructuring, but is it enough to cover both restructuring and the losses which it might be about to suffer? I don't know. I doubt it. It had 73 stores and 174 concessions, last time I checked.
As previously dicussed, I also have a poor view of Quiz's brand positioning. See some detailed analysis by Peter in the second comment below, for more on that.
Therefore, I don't find this share tempting.
Xaar (LON:XAR)
- Share price: 49.3p (+3%)
- No. of shares: 78 million
- Market cap: £38.5 million
This beleaguered industrial printhead manufacturer has accelerated its CEO transition.
The handover of responsibilities and transition have progressed very well and so consequently Doug Edwards has agreed with the Board to confirm John Mills as Chief Executive Officer from today and to step down from the Board.
It's amazing to see this former FTSE-250 member reduced to penny stock status.
I've long held the belief that this could be worth a look, at some point, if it gets its house in order and if the market cap gets too low, relative to the value of its cash balance and IP.
Last month, Xaar sold 20% of its 3D printing business for $10 million. It also issued a call option to the buyer, so that the rest of the business can be had for an additional $33 million. The interested party is Stratasys, an American 3D printing company.
That's about £34 million of total value which could be realised from the disposal. Xaar's market cap is currently £38 million! So this gives some cause for hope, that the shares might finally be near the bottom.
The problem is that Xaar is forecast to make losses for the foreseeable future, starting with at least £10 million this year, and probably a lot more than that.
With losses on this scale, the company is going to have to rely on its c. £21 million cash balance to take the blow. The $10 million infusion from Stratasys is also going to help.
The company looks like it needs a major restructuring/recovery plan, to eliminate or materially reduce the losses ASAP. Bleeding losses for 3 years will see the cash balance dwindle to nothing.
I hoped that I would want to buy these shares if they ever got as low as this, but the prospects are still too poor.
The robots at Stockopedia agree with me (what's that about fools seldom differing?)
According to Stocko, this sits firmly within the Value Trap category.
IFRS 16
I've been meaning to say a few words on this topic.
It doesn't sound very interesting, but it kind of is!
From now on, all leases (with only a few exceptions) have to be shown on a company's balance sheet.
While I acknowledge that views are mixed on the subject, I welcome the introduction of this change.
The main reason is that it means accounts will more closely reflect economic reality.
From a liability point of view, hiding leases from the balance sheet meant that the balance sheet did not reflect the leverage actually used by the company.
Sure, the leases are disclosed in the footnotes. But that's not really solving the problem of why aren't they on the balance sheet in first place!
To give an example, suppose we have Company A which uses a mortgage to buy freehold property. The property and the mortgage are both shown on its balance sheet. The balance sheet therefore appropriately shows the company's leverage, with the mortgage included within liabilities.
Company B decides to lease the property instead. Under the previous accounting treatment, the property and the lease liabilities were both nowhere to be seen on the balance sheet.
Depending on the length of the lease, these liabilities might be very material - not insignificant compared to the alternative of buying the property with a mortgage.
But the company looks less leveraged, even though there is nothing to stop the lease liabilities from bankrupting the company.
As we all know, there are countless examples of off-balance sheet leases sending retailers and other businesses into administration.
If retailers and other types of business are going into administration because of their lease liabilities, then doesn't that seem like the type of liability which might be worth putting on a company's balance sheet? A footnote doesn't quite do it justice.
From an asset perspective, leaving big expensive items such as vehicles and property off the balance sheet, purely because of how they are being financed, is another exception which didn't really make much sense.
Let's go back to our example at the top.
Company A has a big expensive property on its balance sheet, dragging down its Return on Assets (ROA) and Return on Capital Employed (ROCE).
Company B doesn't have the property on its balance sheet, which means the balance sheet has the same shape as a much more capital-light and more efficient business. Its ROA and ROCE are calculated as if it wasn't using any property at all.
This is wrong. Company B is using property just like Company A, but it has merely chosen to finance it differently. It is still using the asset.
And IFRS 16 doesn't unfairly punish companies such as these which use leases, sending them into negative equity. In addition to the lease liabilities, they can put a "Right-of-Use" asset on their balance sheet, which is their right to use the asset until the lease expires.
It's vital not to overlook this point. IFRS 16 doesn't just add liabilities on to balance sheets, it also adds very large assets representing the value that companies get from making their lease payments.
It will take some time for us all to get to grips with using IFRS 16 in practice, but the logic behind it, in my current view, is insurmountable.
On that note, I hope you all have a very relaxing weekend.
Best wishes
Graham
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