Small Cap Value Report (Thu 10 May 2018) - NXT, SDRY, SPRP,

Wednesday, May 09 2018 by

Good morning! It's Paul here.

The big news today for me is the Q1 trading update from Next (LON:NXT) (in which I have a long position) - yes, we all know it's not a small cap, but I cover it here because the guidance is so detailed, and gives all sorts of clues to the overall state of non-food retail.

This is a fascinating time, on a macro level, where the stock market really can't decide where things are going. There's a lot of gloom towards most consumer-facing stocks. There could be some bargains about, but deciding which ones to pick (if any), is our intriguing challenge right now!

Next (LON:NXT)

Share price: 5,632p (up 7.4% today, at 10:13)
No. shares: 141.46m
Market cap: £7,967.0m

(at the time of writing, I hold a long position in this share)

Q1 trading statement

This retail & online fashion (and homewares) bellwether updates us today on the 14 weeks to 7 May 2018.

I had braced myself for a disappointing update this morning, given that poor weather in much of Feb & Mar must have hurt retailers. Also, the BRC reported earlier this week that retail sales had fallen off a cliff in April.

As it turned out, Next somehow managed to trade pretty well overall in Q1, with total sales up 6.0% (against admittedly weak prior year comparatives);


Obviously the stand-out number is the excellent online growth of +18.1%. This supports my view that Next is successfully transitioning to being a predominantly online (in terms of profitability) retailer.

Sales in our Online business were particularly strong and up +18.1%, driven by the growth of NEXT branded stock and third party brands on our UK platform along with continued growth from our overseas business.

What's interesting is that the period of bad weather in the spring doesn't seem to have affected Next much overall. It seems to me that when the weather is bad, Next customers probably switch from visiting the stores, to shopping online.

Note also the spectacular boost from the recent heatwave (see below), which is much greater in magnitude than the impact of the bad weather earlier. NB the figures below combine stores and online sales.

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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

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Superdry PLC, formerly SuperGroup PLC, designs, produces and sells clothing and accessories under the Superdry brand in approximately 670 points of sale across the world, as well as online. The Company offers a range of products for men and women. The Company operates through three segments: Retail, Wholesale and Central costs. The Retail segment's principal activities consist of the operation of the United Kingdom, Republic of Ireland, European and the United States stores, concessions and all Internet sites. The Retail segment is involved in the sale to individual consumers of its brand and third party clothing, footwear and accessories. The Wholesale segment's principal activities consist of the ownership of brands, wholesale distribution of its brand products (clothing, footwear and accessories) across the world and trade sales. It offers a range of products, including t-shirts, polo shirts, hoods and sweats, joggers, tops, dresses, jackets, shirts, footwear, bags and accessories. more »

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Fireangel Safety Technology Group plc, formerly Sprue Aegis plc, is engaged in the business of design, sale and marketing of smoke and carbon monoxide (CO) detectors and accessories. The Company also operates its own CO sensor manufacturing facility in Canada. The Company is also a provider of home safety products. The Company's principal products include smoke alarms and CO alarms and accessories. Sprue manufactures CO sensors for use in all its CO alarms. Sprue serves in the United Kingdom retail and the United Kingdom's fire and rescue services. The Company offers a range of brands, including FireAngel, AngelEye, Pace Sensors, First Alert, SONA, BRK and Dicon brands. The Company's subsidiaries include Sprue Safety Products Limited, which is engaged in distribution of smoke and CO alarms, and Pace Sensors Limited, which is a manufacturer of CO sensors. more »

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  Is LON:NXT fundamentally strong or weak? Find out More »

45 Comments on this Article show/hide all

Volvic1 10th May '18 26 of 45

Just out of curiosity how was the figure of -20% lfl was calculated for SDRY. Sorry if it seems a silly question!

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john652 10th May '18 27 of 45

On The Beach down 13.8%, after 6% rise yesterday, seems a bit harsh.

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ken mitchell 10th May '18 28 of 45

Great update from Paul again on Next, and Next update so clear and concise too. Why can't other Companies do the same? e.g I hold On the Beach and am trying to work out key points like exactly what Management expectations were. And Brokers are the same. e.g Numis today have cut their rating on On the Beach from BUY to ADD but with an INCREASED share price target! And how can any investor "add" without buying?  It's meaningless. Anyway..... hoping now for a Paul Scott hat trick. Bought BOO (probably along with many others here) at 35p, and Next after a very positive Paul update at a bargain £38. French Connection next?

I sold Superdry a while ago, mainly because unlike Next they are increasing their store portfolio despite online being THE success retail area at present. And whenever I've been to a Superdry store including 2 on the Continent, they have nearly always been empty. Yet they opened 18 new stores last year mainly in Germany, but also 7 in the US despite the US often being a graveyard for UK retailers. e.g Tesco, Dixons and M & S all tried and failed. Yet this year Superdry are opening another 10 in the US including Boston and Washington. So more bad news on the stores front ahead?  Very likely.

Unless the Superdry share price falls a good bit further I'm staying away. A possible good buy opportunity could be if/when they announce a change of policy and store closures.

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Impvesta 10th May '18 29 of 45

In reply to post #362313

""Hi Reacher - they actually say “in line with management expectations”. For all we know their expectations might be bankruptcy in 6 months time""

Hi Rob. I'm not sure how your post has managed to gain three thumbs up.  Your comment seems very harsh and, I think, incorrect, unless your quote is from a part of the trading statement which I haven't read or noticed!  What they actually say (with my bold) is:

I look forward to further progress in the second half of the year in line with market expectations".

The company is profitable, debt free, pays a well covered dividend, has a very low price sales ratio and a Stockopedia Stockrank of 95. 

The results look solid, though unspectacular, to me, and the share price has virtually doubled since I bought just under a year ago.  In my view definitely a minnow worth researching.

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slartybartfast 10th May '18 30 of 45

In reply to post #362483

Yes Iain and thereby lies part of the problem. My wife won't got to Next as she ends up having to queue for an eternity behind people returning Online goods. If Next close stores, then will as many people be happy to return goods by post?

Just wondering

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davidjhill 10th May '18 31 of 45

Superdry (LON:SDRY)
I bought some following todays fall. Trading on a fwd PE of 13-14 with reasonable dividend, no debt and a PEG ratio sub 1. Whilst stores are under obvious pressure in UK this was exacerbated in Q4 snow and poor weather early year. Feels relatively good value here to me.

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Reacher 10th May '18 32 of 45

In reply to post #362663

Impvesta - you make valid points and I don't consider management's plans are to aim for bankruptcy. I totally agree with Rob McBride that On The Beach (LON:OTB) should have been more transparent in disclosing their expectations and I have emailed their PR company (FTI Consulting - who appear to be widely used by many small cap companies) requesting some clarity on this. If they do reply, I will share what they have said. In addition, I also have issues with companies that invite analysts to investor presentations and exclude private investors; in this day, it should be simple to have a webcast recording available for everyone.

I've been monitoring On The Beach (LON:OTB) for the past year and have concluded that management appear competent and are running the company well. They aren't aiming for spectacular growth that may result in things going wrong by taking their eye off the ball but are expanding geographically based upon their experience in the UK, whilst also growing in the UK.

Perhaps the share price ran away and the valuation was stretched at 620p before interim results? The question which I am trying to answer is whether the current share price of 553p presents value or is now a fair valuation?

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JohnEustace 10th May '18 33 of 45

Amazon don’t have to buy a business to get fashion expertise. They hired a previous boss of M&S ladies fashion two years ago and she’s been building up her team. They are working with M&S suppliers.
I’m happier holding shares in the disruptor than the disrupted.

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Impvesta 10th May '18 34 of 45

In reply to post #362313

Apologies Rob! I mistook your reply to Reacher's post 9 as relating to his post 10. I now realise you weren't referring to Titon at all! Sorry, my bad! Please accept my apologies and ignore my comments in post 29!!

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Rob McBride 10th May '18 35 of 45

In reply to post #362791

No worries! Apologies accepted :)

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Graham Ford 10th May '18 36 of 45

In reply to post #362778

Agreed. You can just buy in fashion expertise. Sometimes that works, sometimes not.

Does anyone remember the origins of the George at Asda line of clothing? There’s a certain irony that this originated with Asda hiring in George Davies who created Next (LON:NXT), who are being discussed in this thread. The George at Asda brand was very successful for a while and is still going.

For me, a key question has to be, if online is growing rapidly and stores are in decline why hold shares in any clothing company with a legacy of physical stores? Reasons might be that the shares are very cheap or the company operates in a niche where they have some protection from the carnage in general retail. But if they aren’t VERY cheap or in a niche then it seems too risky right now to hold them.

Additionally, perhaps the closing of clothing retail stores gives other companies that are expanding into physical premises a chance to pick up sites on the cheap. E.g budget gym companies that are expanding like Pure Gym (LON:PGYM) and GYM (LON:GYM).  However, Pure Gym have been taken over.  Disclosure - I hold GYM (LON:GYM)

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myayield 11th May '18 37 of 45

In reply to post #362653

Hi Ken your comments regarding SUpderdry - make sense. As a family (17 and 12 yr old sons) we are visiting and purchasing more from this company but mainly the outlet shop in Wembley. Recently went to a regular price store in Oxford prices seem quite high. Currently do not hold.

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iain1234 11th May '18 38 of 45

In reply to post #362728

Yes, good point regarding the closing of NEXT stores and returns. I think Next online is turning into a bit of an ‘Amazon’ in not only selling their own branded goods but also Fatface, jigsaw, Superdry, Nike, etc, etc. If the situation with store closures does become an issue and impact online sales, I would ‘hope’ they’d emulate Amazon and use other peoples shops as drop off points or even open a excellent Amazon-Locker type system.

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JohnEustace 12th May '18 39 of 45

In reply to post #362807

Yes, the George brand was taken up by Walmart and is still going strong. I remember walking into a Walmart in Mexico in 2004 and seeing a big George clothing area right by the entrance. It looked just like my local Asda back home, but with more cactus leaves in the produce area.

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Fegger 13th May '18 40 of 45

In reply to post #362807

If the physical stores are managed well and profitably I look favourably on a retailer retaining them. Remember 83% of retail sales are still in store in the UK: and Next is not solely a clothing retailer. And Next is not specifically targetting the youth market which is most online focussed. Having stores gives flexibility to retail in different ways. Amazon is starting to experiment with some stores. I think a number of retailers will disappear from the High Street and the survivors could do very well out of it. And fashion changes (:)) It could be that future generations will enjoy having clothing parties in store for example.

And I think Next is being very canny in introducing a selection of brands to its stores. It can refresh its offering very easily now and pick up current trends.

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ken mitchell 13th May '18 41 of 45


Thanks for the reply. Superdry prices are high but less than some other exclusive brands, and like Next they are doing well with online sales so price itself is not a problem . What really stands out is the 6% fall in store sales, yet a 13.5% increase in selling space. So why (unlike Next) continue to expand their store portfolio while store sales are so weak? And hidden away in the latest trading update was a £7.2 million write off on their flagship Berlin store! Retail stores generally are struggling.. e.g Debenhams and House of Fraser and Maplin sadly gone bust. And the same applies in some other Countries including the US.

What's more Superdy Management like to have their stores in expensive areas like Princes Street and the shopping mall next to Waverley Station in Edinburgh, or in Berlin. That would be fine IF sales justified it, but do they? So why not, like Next, concentrate more on online and look to consider closing some of the stores that are losing money instead of expanding the store portfolio further?

The only time I've ever seen customers in a Superdry store was in York when they had a sale on. So maybe Wembley also has plenty of customers? But brand names and frequent discounting don't match. Also I've been to 2 of their stores on the Continent and both were empty including Kitzbuhel in Austria where other shops including clothes and other brands were busy.,

The share price fall tells it's own story. Share is down from £20 to under £12 while Next has recovered strongly from £36 low last year to mid £50s. Doesn't that reflect the difference in Management quality, with Next doing a lot right, while Superdry seem to be making an obvious mistake?

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herbie47 13th May '18 42 of 45

In reply to post #363379

Next (LON:NXT) did fall from £76 to below £36, so it's a similar fall, in fact Next (LON:NXT) fell more, maybe Superdry (LON:SDRY) will fall more?

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Zoiberg 14th May '18 43 of 45

In reply to post #362438

See Dearg Doom's piece on May 10th.

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ken mitchell 14th May '18 44 of 45

In reply to post #363403

Next shares did fall as you say, but share price has since gone up 50% (excluding dividends and special dividends) partly because Next explained where things were going wrong and the steps they were taking to rectify mistakes.

Like Next Supergroup are doing very well online. BUT unlike Next they seem blind to the fact that stores are the weak area and are continuing to expand store space despite falling store sales. This is taking the shine off the excellent Superdry online performance and will continue to impact on their profits, until they find a way of improving stores performance OR cotton on that expanding stores while store sales are falling doesn't make sense.

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riosurfer 14th May '18 45 of 45

The problem with Superdry may be the strength of the brand, or the lack of it to be more precise. I think Superdry is founded on gimmicky appeal, rather than an enduring proposition. There is little to substantiate its designs, aside from the use of Japanese messaging (gimmicky). This was cool for a while, but as the novelty wears off, consumers are seeing that there is little else to substantiate Superdry. Indeed, as the brand is growing, an older and decidedly uncool audience is seen wearing the brand more and more. Superdry needs to convert its momentary coolness into a more substantial - and sustainable - positioning. If not, the sales decline will continue and it will go the same way as Abercrombie & Fitch, Hollister and others.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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