8th Feb '22 by Paul Scott

68 comments 11064 reads

Good morning, Paul & Jack here with Tuesday's SCVR.

Agenda -

Paul's Section:

Joules (LON:JOUL) (I hold) - see the comments section below, where I put up my initial thoughts on the (delayed) interim results out this morning. Share price looks to have seriously overshot on the downside, so I think there's a buying opportunity here, if you think (as I do) that profits should recover as supply chains ease at some point. Going concern note is better than I was expecting too - possible breach of facilities in downside scenario, but plenty of mitigating actions they could take if that scenario plays out. So shouldn't be a problem. 52p strikes me as a ludicrous under-valuation (mkt cap £58m).

Update at 11:57 - main section on Joules is now up.

Beeks Financial Cloud (LON:BKS) (I hold) - another contract win. This niche IT services company seems to be making excellent progress. It's won a £2.5m, 3 year contract extension with an existing client, to go into a new territory. Hence a record quarter for contract signings. When you look at the potential size of its markets, globally, this company could be a multibagger I reckon. BUT, it has to be seen as high risk, due to the market cap already looking expensive - worth it, for the growth potential, in my opinion. (no section below).

Avon Protection (LON:AVON) - a contract win from the US armed forces, for helmets. Sounds good, but the minimum & maximum contract sizes are wide apart, so it's not immediately obvious what financial benefit this contract is likely to bring. Still, it could help shares stabilise, after a disastrous recent history for this group.

Explanatory notes -

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hjg123

8th Feb '22

Hi Paul,

Thanks very much for the response and update on your call with management - very helpful. I missed that net debt was lower in these interims than in the TU they issued at end of Jan, so I wonder if even more has gone into inventories.

But as you say, it's very difficult for management at the moment because if they don't stock up with 9 week lead times then they run risk of another profit warning.

Thanks!

tic_tac_toe

I also saw mentioned elsewhere that bunging a load of surplus stock to TK MAXX or an outlet to clear the stock has a risk of devaluing the brand somewhat.

EDIT: thinking about it didnt something like this happen at TED, where they had a shed load of inventory stock that was essentially not worth the booked value and they had to sell it cheap.

Gostevie

Re B.p. Marsh & Partners (LON:BPM) , I had the misfortune of meeting Brian Marsh a few times in my professional career and if I truly spoke my mind here about what I think of him I would probably be banned. That said, the company seems to have done well for shareholders.

planetx

There is a lot to be said for TK Maxx , hardly "devalues" the brand IMHO .

TK Maxx generally pay a good price for stock (in my experience when we sold to them) and there are some pretty nice brands in there , a lot of whom clearly produce garments specifically for TK Maxx .

If its a question of "cash in bank / stock turn" selling to TK Maxx versus not selling to TK Maxx under the illusion of devalued brand, then I am pretty sure that cash in bank wins.

Personally me, my kids and friends would never shop at Joules but would shop at TK Maxx , so thats a new customer .

Then again we are tight northerners probably not the target audience for any of the aspirational "lifestyle" high margin rag trade brands full of their self importance when really its a t-shirt generally made in India / China etc .

"Talk is cheap , cash buys houses" as someone once reminded me .

useful perspective, thank you

gringo

Thats a very balanced review of where Joules (LON:JOUL) is right now Paul.

The company seems confident these are temporary problems. Im more glass half full than empty right now as they have some flexibility and control of their own destiny to some extent, as you say. Can see a 1,2,3 bagger at 50-60p if they can turn this around sharpish.

What I'd like to see now is big director buying at these levels. Put their money where their mouth is. Tom Joule flogged £12million worth at 230p last year so some substantial buying -Not piddly little 50-100k buys- would exhibit a show of confidence.

Boon

10 year US Treasury yields getting close to the psychological 2% level today. Wonder whether we will see big market volatility.

Raleigh4343

Took some Joules today as it looks good for a recovery have watched from the sidelines for some time. Yes it has issues, but what businesses don’t? Issue are solvable and there’s enough good stuff in there at this price.

Paul Scott

Hi zipmanpeter,

This bit you wrote is incorrect -

"Garden Trading sells bulky furniture not clothing for example and they celebrate 20,000 skus on offer via Friends of Joules. Whilst a great story, I was surprised it has only added only £3Mn to H1 sales , after £V2 and 0.9Mn in P2 yrs. A lot of complexity for little gain - a busy fool project. I hope this is where a lot of the simplification is going to occur."

Actually, Garden Trading contributed £9.8m revenues in H1, quite significant, that's 7.7% of total group revenues.

I worked this out manually from this part of the interim results statement (sorry text has gone huge, not sure why) -

Group revenue increased by 35% to £127.9m from £94.5m, reflecting a strong recovery across our own retail stores as well as those of our wholesale partners, further total e-commerce growth from our third-party e-commerce partners; and the inclusion of Garden Trading, acquired in February 2021. Excluding the impact of Garden Trading, revenue grew 25% in the Period.

Epsilon

So back to the levels of January 2020.

I imagine a return to the level of 10 year yields in the early 1980's would have more of a psychological impact...

Depends on how many investors have been around since the early 1980s. For that time to be their anchor.

Presume the "hot retail" money currently sloshing around, the wallstreetbets and robinhood options traders, were they even born by 1980?

But interesting that we're approaching Jan 2020 treasury yields of 2%. The FTSE100 is now back around the levels of Jan 2020, and the AIM100 is quite a bit below. Mayhaps the market correction of Jan has gone too far?

However, the key question is where treasury yields up in a few months time... could they go back to 3% levels or even 4%?

Brookeda

Its questionable how many successful business people are actually nice. To some extent they need to have a nasty side to make tough decisions

simmsc

interest rates will stay at relatively low levels due to the fact that we will be returning to the same world we were in for 10 years before the pandemic. Namely, the US economy will again become a net saver to the tune of 6 percent of GDP (every year!). This enormous amount of cash (every year) being removed from the economy (and stuck in the financial system) rarely gets mentioned or discussed. And historically, after big economic shocks (like the great depression, like the Japanese real estate collapse, like the recent financial collapse and like a pandemic like we just had) the economy (households and companies combined) becomes an even bigger net saver than it was before. Net saving is caused by more saving and more debt reduction (compared to how much is being borrowed and how many savings are being drawn down). This will also lead to tech outperforming value stocks again (just like they did for 10 years before the pandemic) for the simple and same reason that only companies with serious momentum behind them (hence called growth stocks) can cope with that amount of cash being withdrawn from economy, each year. Value stocks with their low momentum behind them can't cope that kind kind of cash drain. This current "value stocks outperforming tech stocks" will and can not last long. You heard it first here.

One of the key questions (every economist i have met) doesn't have the answer to is: why did the US economy, despite low interest rates for a whole 10 years before the pandemic, not overheat or suffer from high inflation? Economists were taught at the lse (or whatever place they went to) that low interest rates feed growth and inflation. Where was this high growth and inflation in the US? Why did the Japanese economy not grow ultra fast and have high inflation after 20 years of ultra low interest rates (and massive money printing on top)? Where has the correlation between interest rates and growth\inflation gone? It was never there is the first place. That's why. Economies can not grow if there is a lack of demand for funds and when economies, due to this become net savers (that's where the answer lies and always has been). Only, and only if economies (households and companies combined) are net borrowers do economies grow. Forget this whole thing that low interest rates create growth. CEOs would be shot down if they at an AGM said in they decided to grow their company because they borrowed money due to interest rates being low. Low interest rates provides the same amount of growth and inflation as father xmas delivers presents at Easter. None.

Zipmanpeter

9th Feb '22

Paul,

I get how you got to £9.8Mn being the diff between 25% and 35% on the 94.5Mn base. However, this is Garden Trading AND Friends of Joules AND sales on 3rd party platforms - see extracts below.

From the E-commerce section, I understood "Garden Trading’s retail revenue, which is all e-commerce, performed in line with management expectations and contributed £5.4m to the total e-commerce revenue in the Period.

and on re-reading, I think I even overstated the revenue from Friends of Joules marketplace is even smaller and should have been £1.3Mn not £3.0Mn.

OTHER REVENUE
Other revenue consists of royalties from the sale of licensed products sold within third-party partner channels ( Edit: I assume this means Joules sales on Next etc) and the commission received on the sale of Friends of Joules digital marketplace products (Edit: others brands sales on Friends of Joules).
The Friends of Joules digital marketplace provides customers with a broader online offer, and by the end of the Period was home to over 20,000 products curated from 500 third-party sellers.

Other revenue increased by 48% to £3.0m (H1 FY21: £2.0m), reflecting strong growth in the Friends of Joules digital marketplace (Friends of Joules revenue increased by 69% to £1.3m (H1 FY21: £0.8m) and continued growth across licensed product categories

Now how much work they have to do for this Friends of Joules revenue is not clear to me but even keeping listing up to date and talking to 500 3rd party sellers will be work.

Maybe I am missing something or they are over-stating the number of real, active products but £1.3mn/20,000 is an ave. £65/sku/yr! Kind of hope I am wrong as having a successful platform would make sense to widen the brand offer easily and platforms are (were!) valuable.

abtan

Joules (LON:JOUL) (no position)

Hi Paul

Thanks for your analysis of Joules.

I went through the numbers myself this morning and agree with your medium term analysis that profits should recover and that the current share price therefore looks far too cheap.

But after reading your comments on the £15m increase in net debt between November 2021 and January 2022, which I had missed, I have decided not to take a position.

The only thing I can think to explain this is an increase in Gardening inventory now that spring is almost upon us, but surely the group made enough from clothing sales to offset this?

Continuing your point on the extremely high Head Office costs, I noticed in the Annual Report that there are over 500 employees at Head Office, which seems like a ridiculous amount given that distribution is outsourced and Store staff are in addition to this.

Why do they need so many people? Or perhaps I've misunderstood central office functions for a fashion retailer.

Hopefully there will be clarity soon as the depressed share price does look appealing.

Cheers

Sorry, I should also add that the Garden Trading (GT) revenues were very confusing.

As you pointed out Total GT revenues were implied to be £9.8m.

But working through other comments (see below) implied that GT actually generated revenues of £11.0m (£5.3m Wholesale + £5.7m Retail.)

Which is it?

I often get confused with the Joules (LON:JOUL) updates and was getting worried that everything matched up this time. Fortunately the company came through in the end.

"Wholesale revenue, excluding Garden Trading, increased by 16% year on year, reflecting the reopening of the Group's wholesale partners in the UK and internationally."
IMPLIES £5.3m GT WHOLESALE REVENUE

"Total retail revenue of £99.8m was 33% higher than the prior year (FY21: £75.3m) and 25% higher than the two-year comparative. Excluding Garden Trading, the growth was 25% versus last year and 18% on a two-year basis."
IMPLIES £5.7m GT RETAIL REVENUE

Fegger

10th Feb '22

Decision made for homeware. TK Maxx have a range of Joules bedding on sale today. Would not be surprised to see clothing follow. Dont think it devalues a brand especially on a one off occasion

Just seen it. Looks like nice stuff too. BTW I ordered some Joules clothes last night. They have some great products.

MarkPP

19th Feb '22

On Joules isn't the working capital move 28 Nov to 31 Jan driven by payroll and the month end payment run which would have occurred on 31 Jan but not on 28th Nov.

Small Cap Value Report (Tue 8 Feb 2022) - JOUL, BKS, AVON

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