McColl's Retail (LON:MCLS)

  • Share price: 280p (-3%)
  • No. of shares: 115 million
  • Market cap: £323 million

Q4 and Full Year Trading Update

This is a chain of newspaper and convenience stores which has been listed since 2014.

I've tended to be a bit sceptical of it, because it screams "no economic moat" to me.

The PE multiple afforded to it by investors has generally been on the lower end of the scale, and that remains the case today. But to be honest, this PE ratio still looks possibly on the generous side to me:

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This year, it has been integrating 298 stores acquired from the Co-op, which bring the total estate to over 1,600 now, most of these being convenience stores rather than newsagents.

Because of that acquisition, the headline growth numbers aren't too important here. What matters is like-for-like sales, which are up 0.1% for the full-year, i.e. effectively unchanged.

Q4 LFLs were down 0.4% due to category mix and unfavourable weather. Weather had been a positive factor earlier in the year, so maybe the full-year result is neutral weather-wise?

Either way, it adds up to an in line with expectations update for the full year.

And the plan for next year is to continue refreshing its convenience stores with the goal of selling more of the higher-margin categories (food rather than newspapers and cigarettes).

My opinion

I'm not sure why this has re-rated so strongly this year, but clearly investors approve of the Co-op acquisition, and it has been executed well so far.

That deal was mostly financed by debt, which stood at £111 million (net) at the interim results.

With the company being significantly more leveraged than it was before, I would have put it on lower valuation multiples than it enjoyed before, to take into account the increased risk.

This is a fiercely competitive sector. Indeed, McColl's announces today that one of its main suppliers has gone bust as of last week.

I don't know the specific circumstances of that company, but if a huge supplier has been squeezed to the point where it can no longer continue, it's a bad omen in terms of McColl's being able to defend its own thin margins for the long-term. Alternative arrangements will have to be made, with a supplier who gets paid…

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