Small Cap Value Report (Thu 11 Jan 2018) - TSCO, MKS, John Lewis, BOO, GMD, CARD, AO., GMD, LRM

Thursday, Jan 11 2018 by

Good morning, it's Paul here.

I got up early today, to finish off yesterday's article (was too tired last night to do any more work). So I've added new sections on ShoeZone results, and Focusrite's trading update. So to get you started today, here is the link for yesterday's expanded report.

It's an absolute avalanche of trading updates today, here are some quick bullet points on mid to large cap retailers, which might be of interest, for read-across to smaller companies, and the economy generally (we need to keep our eye on the macro picture);

Tesco (LON:TSCO)

  • Seems to be trading well.
  • Positive Q3 LFL sales of +2.3% on a LFL basis.
  • Positive Xmas trading, +3.4% LFL in food
  • Problems at Palmer & Harvey, and "ongoing drag" from general merchandise - "took the shine off an otherwise outstanding performance"
  • We are confident in the outlook for the full year and are firmly on track to deliver our medium-term ambitions."

Marks and Spencer (LON:MKS)

Q3 update, for 13 weeks to 30 Dec 2017

  • Full year guidance remains unchanged
  • Total UK LFL sales down -1.4%
  • Food better (-0.4% LFL) than clothing & home (-2.8% LFL)
  • eCommerce growth only +3.0%
  •  "M&S had a mixed quarter with better Christmas trading in both businesses going some way to offset a weak clothing market in October and ongoing underperformance in our Food like-for-like sales...

John Lewis

Update for 6 weeks ending 30 Dec 2017

  • Waitrose LFL sales up 2.2% (adjusted for New Year's Eve mismatch)
  • John Lewis LFL sales up 3.1%
  • Black Friday went well, so looks like a permanent fixture in the retail calendar now.
  • "The pressure on margin seen in the first half of the year has intensified because of our choice to maintain competitive prices, despite higher costs mainly due to the weaker exchange rate. This will negatively affect full-year financial results as indicated previously."
  • "Looking ahead to 2018/19 we expect trading to be volatile due to the economic environment and anticipate that competitive intensity will continue, driven by the structural changes taking place in the retail industry. "

So, sounds like many retailers will continue to struggle in 2018. Good news for consumers though.

Boohoo.Com (LON:BOO)

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

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Tesco PLC (Tesco) is a retail company. The Company is engaged in the business of Retailing and associated activities (Retail) and Retail banking and insurance services. The Company's segments include UK & ROI, which includes the United Kingdom and Republic of Ireland; International, which includes Czech Republic, Hungary, Poland, Slovakia, Malaysia and Thailand, and Tesco Bank, which includes retail banking and insurance services through Tesco Bank in the United Kingdom. The Company's businesses include Tesco UK, Tesco in India, Tesco Malaysia, Tesco Lotus, Tesco Czech Republic, Tesco Hungary, Tesco Ireland, Tesco Poland, Tesco Slovakia, Tesco in China, Tesco Bank and dunnhumby. The Company's brands include Finest, Everyday Value, Chokablok and Technika. Finest and Everyday Value are the two food brands in the United Kingdom. The Company offers a range of personal banking products, principally mortgages, credit cards, personal loans and savings. more »

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Marks and Spencer Group plc (M&S) is a retailer in the United Kingdom, with over 1,380 stores around the world. The Company is the holding company of the Marks & Spencer Group of companies. The Company operates through two segments: UK and International. The UK segment consists of the United Kingdom retail business and the United Kingdom franchise operations. The International segment consists of Marks & Spencer owned businesses in the Republic of Ireland, Europe and Asia, together with international franchise operations. The Company is engaged in delivering own brand food, clothing and home products in its stores and online both in the United Kingdom and internationally. The Company sells womenswear, lingerie, menswear, kidswear, beauty and home products, serving customers through approximately 300 full-line stores and Website, M& It has approximately 910 United Kingdom stores, including over 220 owned and approximately 350 franchise Simply Food stores. more »

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Boohoo Group PLC, formerly plc, is an online fashion retail group. The Company is based in the United Kingdom and has a presence in the United Kingdom, the United States, Europe and Australia, selling products to almost every country in the world. The Company owns the boohoo, boohooMAN, PrettyLittleThing, Nasty Gal, MissPap and Karen Millen and Coast brands. These brands design, source, market and sell clothing, shoes, accessories and beauty products targeted at 16-30 year old consumers in the United Kingdom and internationally. more »

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64 Comments on this Article show/hide all

david brander 11th Jan '18 45 of 64

REBoo,wonder what the internal forecasts are for My Little Gal are .Judging by revenue only looks like this could really be a winner .Also are the the products copied from the Uk and where are they manufactured.

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gus 1065 11th Jan '18 46 of 64

Boohoo.Com (LON:BOO) now (15:25) down about 7% on the day. Seems reminiscent of the sharp drop last year when they came out with a similar apparently strong update. Wonder if one or other of the Directors is trying to place a substantial line of stock again?


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fwyburd 11th Jan '18 47 of 64

In reply to post #296613

Re Wey Education (LON:WEY)
I've not been convinced either about their marketing strategy since they outlined it a week or so ago. However I wasn't there last night so it would be great to understand more about what their strategy is - could you summarise it for us?

If it's as weak as I suspect, they can always grow through acquisition but that carries other risks and costs.

I remain on the sidelines too.

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Paul Scott 11th Jan '18 48 of 64

In reply to post #296598

Hi Trident,

Paul. Re: Card Factory (LON:CARD). I am not sure you can call a business ex growth when it sales are growing, and it is still expanding its store rollout.

Just to clarify, I was talking about profits growth. Broker note out today shows flat profitability for next year, and only a small increase the year after. I think this is why the share price of CARD has fallen so sharply today - because it's doubtful whether the company can now maintain, let alone increase its profits - even with 50 new stores p.a. being added. With over 900 UK locations already, they must already have sites in most viable locations.

So I think CARD might just slowly slide down in price, and become a high yield, zero profit growth (or declining profit) type of company.

Regards, Paul.

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VegPatch 11th Jan '18 49 of 64

This is v simplified
But it went something like this
Total marketing budget 2016 £100k, FY17 £160k
Where are they spending more £££ ?
"Lots of people go to stations, we are spending on bill board for a month at Waterloo and interviewing people to see if they would consider an online school and making me it into a video blog" (watch out Facebook there is a new kid on the advertising block !!!)
Spending on getting articles on sites like Mumsnet promoting alternatives to schooling children conventionally seems sensible
That is it In a nutshell (and took c1/30th of time it took last night to explain)

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FREng 11th Jan '18 50 of 64

In reply to post #296613

If Wey Education (LON:WEY) could be persuaded to store all their qualifications on a blockchain (which isn't a silly idea because it could guarantee that they were available to anyone who wanted to check them, anywhere in the world, and that they couldn't be forged) then the impact on their shareprice would probably be disproportionate (and welcome - I hold).

It would seem to be be easy and cheap to do, using the Etherium blockchain as the infrastructure.

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IGotPoesJacket 11th Jan '18 51 of 64

I don't get the argument that BooHoo are slowing down therefore there's an issue, when the group as a whole are increasing the topline. The reductionist argument to this becomes BooHoo sales are zero therefore the company is worth zero even though the other 2 brands sold £2Bn at 9.5% margin.....
So what if PLT/NG some other brand they set up overnight cannibalises BooHoo, it's all group revenue and it's eating the competition's share faster than it's eating its own.

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Trident 11th Jan '18 52 of 64

Re: Card Factory (LON:CARD). I note that the CEO has bought circa £50K worth of shares today.

Bit of an amateur PR move perhaps? Beginning to suspect/wonder whether she is on top her brief, as rather leaden RNS's are delivered one after another. Its been a machine for making money, and now it needs a bit of zing, as its not in the sexiest sector. Is there anything she is doing that is original?

Hurting a bit today, as you might gather!

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matylda 11th Jan '18 53 of 64

Thanks Paul for Footasylum (LON:FOOT) - So annoying!

Blog: Briefed Up
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fwyburd 11th Jan '18 54 of 64

In reply to post #296658

Thank you VegPatch, kind of you to share. 

But pretty underwhelming stuff from them - did they talk about their European expansion plans for the Tefl offer? 

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VegPatch 11th Jan '18 55 of 64

Err I had a SW train to catch so had to leave early.
FWIW I really couldn't get interested.

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jonesj 11th Jan '18 56 of 64

In reply to post #296608

So essentially there's an incentive for management to prioritize growth and revenue accrual at PLT, above the main business ?

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bestace 11th Jan '18 57 of 64

My take on the Boohoo.Com (LON:BOO) announcement.

The top line growth continues to look great and the EBITDA margins have not deteriorated any further, which seemed to be the market's concerns after the interims.

However they have not disclosed their active customer numbers broken down by brand, which is something they have disclosed in every other trading update or results announcement until today.

They did include this statement, buried in the 'About boohoo' section which people generally don't read:

Today the boohoo group sells to over 8 million customers in almost every country in the world. 

However that exact same wording (with the same 8 million figure) also appeared in the interims, and it's a rather vague statement as it doesn't seem to refer to active customers only. So are they implying growth in customer numbers is stalling since the interims?

Given that they used to provide the full detail on active customer numbers, the management must have made a conscious decision to stop doing so this time round. Why is that?

I wonder if it's because with the boohoo brand showing 'only' 25% top line YoY growth in the last 4 months, the increase in active customer numbers since the interims is not particularly flattering? I previously expressed some concerns on these pages about their customer churn rates, and the decision to stop publicising the detail on customer numbers isn't exactly assuaging those concerns.

Speaking of margins, since listing the revenue growth of the boohoo brand has bounced between 35% and 55%, so the 25% YoY growth in the last 4 months represents a considerable drop off, and I don't find the comment about tough comparatives that convincing.

On the plus side, despite the increase in top line guidance, they continue to be laughably conservative with their guidance: revenue growth for the last 2 months of the year would have to slow to something like 5% year-on-year for the boohoo brand and to 15% YoY for the PLT brand in order to hit their overall 90% revenue growth figure.

Given the current run rate of revenue growth, I think a slowdown that rapid is most unlikely, so I'm still expecting the final revenue outturn to be more like 100% growth or possibly better.

Based on 9.5% margins, a doubling of revenue would imply EBITDA of £57m which, despite the reduction in margins is still higher than guidance issued earlier in the year, thanks to the strong top line outperformance.

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underscored 11th Jan '18 58 of 64

In reply to post #296693

Is it possible that all the bulls are fully invested?

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billytk 11th Jan '18 59 of 64

In reply to post #296908

Will be interesting to see how the ASOS (LON:ASC) results compare with regard to growth, due on the 25th

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abtan 12th Jan '18 60 of 64

In reply to post #296373

Re. GAME Digital (LON:GMD)

Cash @ YE 2016/17 = £43m
Sales Proceeds = £17.1m (£19m less 10% held in escrow)
Cash today = £67m

So cash increased by £6.9m as far as I can make out.

I can't see any mention on where money has been spent, but the cash position seems quite healthy, even before rent savings start flowing through in the next 12 months


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Wimbledonsprinter 12th Jan '18 61 of 64

In reply to post #296933

Abtan. I assumed that GAME Digital (LON:GMD) were including the escrow cash (restricted cash) in their total cash number - maybe you are correct and they do not.

I agree that the £67 million cash number is healthy but cash is hugely seasonal and end-Dec and end-Jan appears to be a peak (post Christmas - almost 2/3 of sales come in the first half). I assume that the end -July figures are more representative (which was still heathy £43 million in July 2017). But the company also have large financing facilities - which, according to the 2017 full year report - were more frequently used by the Spanish business in FY2017 (than the previous year). So this supports the hypothesis that the cash number fluctuates throughout the year - it would be useful to have an average net cash position reported by the company.

The financing facilities look very ample which gives confidence that there is no prospect of the business running out of cash in the foreseeable future.

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Mike Rawson 12th Jan '18 62 of 64

In reply to post #296658

Wey Education (LON:WEY): I think it was just one week for the massive video billboard at Waterloo, then a further week for small vertical info points on some of the platforms.

I think their marketing problem is that each of the four products needs completely different approaches, and all four need growing simultaneously.

Blog: 7 Circles
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fwyburd 12th Jan '18 63 of 64

In reply to post #297113

There's a blog post here from Roger Lawson about the Wey Education (LON:WEY) meeting. He's as underwhelmed as I am about their marketing plans.


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daveinthelakes 12th Jan '18 64 of 64

I would like to thank all contributions on Wey Education (LON:WEY) over the last couple of days.

I had my doubts about the ability of the company to implement a rapid growth strategy and had sold 25% of my holding on 2nd Jan. The posts here convinced me to sell the remainder.

I have no doubt about the potential in this sector but am not convinced Wey has the capital or management to deliver this in timely fashion.

Thanks, Dave

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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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