Small Cap Value Report (Wed 9 Jan 2019) - SOS

8th Jan '19 by Paul Scott

78 comments 19090 reads

Good morning, it's Paul here.

To get you started this morning, please see yesterday's completed report here. I added new sections on the trading update from Staffline (LON:STAF) , and also reviewed the disastrous results from (privately owned) fast fashion website, Missguided.

Today's big news is the Q3 (Oct-Dec) trading update from Sosandar (LON:SOS) which is my largest personal holding, so I'll be focused on that first thing.

EDIT: I spent the whole day working on Sosandar, and was too tired to do any more writing in the evening. So I got an early night, and have resurfaced early on Thu morning, to continue writing about Weds other share announcements of interest. These are now in Thursday's report here.

Sosandar (LON:SOS)

Share price: 32p (before market open)
No. shares: 116.2m
Market cap: £37.2m

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

Trading update

Sosandar is an online-only womenswear fashion brand. It launched in autumn 2016, and floated on AIM via a reverse takeover (of a cash shell called Orogen) in Nov 2017, at 15.1p per share. It is based in Wilmslow, with logistics out-sourced to Clipper. IT is also out-sourced, using Magento software. The founder joint-CEOs have a fashion magazine background, having founded & edited Look magazine. This is my largest personal shareholding, which I am treating as very long term - backing great management basically, with a big opportunity to fill an under-served niche.

Today's update covers the seasonal peak trading of Oct-Dec 2018 (Q3 in Sosandar's financial calender, with a 31 Mar 2019 year end)

I've just come off the phone to management, as I wanted to ask some questions & incorporate them into this report, hence the delay in posting this.

Main points;

Revenue - Q3 revenues were £1.6m (up 209% on the prior year comparative) - very good growth, but personally I was hoping for a figure nearer to £2.0m, so my expectations got a little ahead of things. Memo to self: don't get over-excited over short term numbers.

Growth rate - I queried the deceleration in revenue growth from H1 (+407%) to Q3 (+209%), with management this morning, who made the following valid points;

Tougher prior year comparatives from Q3…

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moolahcoast

9th Jan '19

not sure if money was invested by management but
both ceos have 13.7m shares each
next up is Lombard Asset Management with 8m
Nicholas Mustoe - non-exec - just over 5m
Milton Group just short of 5m
etc..

MichaelFBS

Paul what an amazing report on Sosandar (LON:SOS). I haven’t read it completely but just brilliant. Thank you.

Will read thoroughly on the train tomorrow. And being 33% of their 52 week high may just pick up a few to tuck away.

Michael

Meldrew

10th Jan '19

I have read that some online clothes retailers employ a number of models in various sizes. The customer can enter their details and see what the garment looks like on a model of their shape and size.

Customers benefit by having a better chance of buying what they expect to get and the retailer benefits by reducing the number of returns.

For instance, ASOS, In a bid to help consumers choose garments based on their body shape, has introduced models of all sizes wearing the same items. It gives customers a greater understanding of what the outfit will look like on them courtesy of a wider range of more diverse models.

Perhaps SOSANDAR might benefit from introducing a similar system.

Windmillwitney

Thanks Paul for your hard work on Sosandar, a holding of mine prompted by your enthusiasm for it.
I too take a long term view and will hold.
All the best for 2019. Great to see you again at Mello. Charles

samenic

Amazing analysis.Thankyou.

hayashi22

I disagree. SOS uses models in their 20s for the clothes ..not the same as the target audience. Someone asked about this at a recent presentation. Can't quite remember the answer ..something about the clientele (frumps) who buy the gear imagining that they look like the models.

mojomogoz

If Sosandar (LON:SOS) sustains sale growth at 100% YoY (not impossible given size and experience of prior emergent online retailers) then a valuation at 5-10x run rate sales seems to be the rough price window. Sosander sits middle to top end of that currently. By summer 2019 that means Sosander can double from current price.

There's seems to be a credible argument that it should go to the top of that range as evidence so far suggests it will have a better ongoing margin than others.

I am not comfortable with the above valuations...its just my interpretation of the market treats stocks like this through a variety of cycles.

AnonymousUser192020

I tried to Aunt Sally the SOS ultimate market size, but concluded the range of outcomes is too large to be helpful.

Say 300k females per year of birth in their target age range.
20 year cohort being their target market (eg age 30 to 50).
Then a 'Drake analysis' of eventual penetration rate:-
Say 10% in target demographic (smart upper middle class, but not 'boutique' purchasers)
75% shop online for clothes (other 25% think not worth the hassle, prefer stores)
20% SOS eventual market share (bearing in mind many will prefer bigger, established/mainstream names, competition will grow)
Then 10% x 75% x 20% = 1.5% net penetration rate

So steady state Active Customers = 300k x 20 x 1.5% = 90,000

Typical annual spend = £200 (eg £100 net of returns each spring and autumn)

Then ultimate revenue = £18m pa, representing 4-5x current levels

But really there's a large sensitivity to each of these assumptions.

Free returns: whoever started this 'race to the bottom' has a lot to answer for. It seems hugely wasteful and damaging to the environment for all this stuff to be shuttled up and down the country, especially if some is eventually thrown away and not resold. (Being a GOM of retirement age, I've bought just one item of regular clothing in the past 4 years, but bought plenty of cycle wear online, absolutely none of which I've had to return.) It just doesn't sound right that these speculative purchases are encouraged.

Picking up on another poster, I'm sure I read a month ago a German tech company is developing better measuring systems. And when 3D time-of-flight phone cameras/ augmented reality take off presumably there will be apps to guarantee proper sizing. This is probably a couple of years off still.

Looking further into the crystal ball, I do wonder if 'peak fashion choice' has been reached and we'll see a decline as gender equality takes root? Already it's said that young men are nowhere as interested in cars as they were a generation ago, so perhaps women with become less fussed about fashion. And then there's the reported decline in discretionary expenditure on 'stuff' as opposed to experiences. Possibly quality second hand sites will grow to cater for those concerned at the waste inherent in buying expensive clothes for just a handful of wears, without the 'stigma' and hit-and-miss of buying from a charity shop?

Nick Ray

Picking up on another poster, I'm sure I read a month ago a German tech company is developing better measuring systems. And when 3D time-of-flight phone cameras/ augmented reality take off presumably there will be apps to guarantee proper sizing. This is probably a couple of years off still.

There is this: https://zozo.com/gb/en

It seems to be more of a marketing gimmick to be honest though.

Zipmanpeter

12th Jan '19

Nick,

Thank you so much for sharing the link to the Zozosuit (see picture below). This lets users at home exactly define their size by taking 12 photos with a smart camera and sending details off to Zozo, a Japanese fashion company.

Some Googling shows they have sent out millions of these but have now stopped claiming they have enough data to go back to simple height & weight and eliminate the upfront cost of the suits, quoted as $15 each but sold to me at 3.95 Euros.

5c39ca400c248190111__Zozosuit_for_establ

This looks like a brilliant concept and line of travel that will (somehow) solve the "doesn't fit" / what's my size problem and improve fashion design......but difficult for any one company to afford to do it. Zozo should set up a separate company to do this and sell the data to clothing companies.

(I also think there could be other unpredictable secondary niche markets for the suits - home videos, personalised 3D games characters, ?????)

Given the collective economic and environmental benefits or reducing waste from returns, it would even make sense for a group of companies or trade body or even govt body to do this in major markets (since Japenese body shapes will typically be a bit different to UK ones, for example).

It may be a marketing gimmick but someone trusted with scale in the market (Next?) could really take it somewhere. For instance if you stored your image with them, they could then send you personalised pictures of you in their clothing.

Taking it from current 40-50% returns in womens clothing to nearer 20% would save several % margin points from online retailers costs (less postage in and out, reduction in returns handling etc. This is a huge prize!

Medium term it seems likely that the fit problem can be largely solved.

A little googling shows there are many app developers trying to get in on this, and they're all seeking to integrate with online retailers, so that must be a good thing. Apparently ASOS are supporting one initiative. Not clear yet whether a killer app will emerge. For me though, a 3D tape measure has always worked fine! Eg

https://www.mediapost.com/publications/article/330084/an-app-to-size-clothes-would-be-fitting.html
https://www.virtusize.com/site/
https://sourcingjournal.com/topics/technology/measuring-up-3-d-body-scannings-revolution-and-its-impact-on-apparel-sizing-gs-68999/
https://venturebeat.com/2017/06/30/3dlook-launches-a-smartphone-body-scanner-to-help-apparel-retailers/

Howard Marx

Millen, that's an impressive granular analysis of the prospective sales of Sosandar (LON:SOS)

My back of the envelope calculation is a little more simplistic.

The size of the target market (women aged 25-54) is £3.7bn per annum according to a recent Sosandar (LON:SOS) presentation:

Hence Sosandar (LON:SOS) can achieve £37m of Sales for each 1% market share they achieve.

Confusingly given the stated target market (ages 25-54), Sosandar (LON:SOS) currently achieve almost half of their sales in other age groups.

5c3a104a39a6eSOSANDAR_customer_demograph

The company claim that this breadth of demographic appeal improves the lifetime value of the customer in that their customer's wont necessarily 'grow out' of the brand as they get older.

In conclusion, it would appear that Sosandar (LON:SOS) have a large market opprtunity in terms of Sales, far larger that their current market cap of £34m appears to be discounting. That said, it's far from clear as to when these Sales will get converted into profitability as the company will likely raise the marketing budget in the next few years to attain critical mass in revenues.

JohnEustace

Amazon were granted a patent back in 2007 for an on-demand clothing manufacturing system. I expect their Echo Show device will be a customer interface for that system, for those that are not too concerned about their privacy at least. The employees at Amazon owned Ring are reported to have been able to freely access the feeds from their connected doorbells.

https://www.recode.net/2017/4/18/15338984/amazon-on-demand-clothing-apparel-manufacturing-patent-warehouse-3d

https://www.theverge.com/2019/1/10/18177305/ring-employees-unencrypted-customer-video-amazon

abtan

EDIT: I just re-posted the below in a new Thread:

https://www.stockopedia.com/co...

Apologies for any confusion.

Genuine question for any readers here:
Are you still wearing the same brands you wore 5/10/15 years ago?

I personally hardly ever buy clothes (frugal/can't be bothered/happy to get the annual jumper present at Christmas) so it's hard for me to answer my own question with respect to the potential longevity of a brand such as Sosandar (LON:SOS)

If I had to pick one brand that has lasted within my own closet it would have to be Zara, but that's mainly because the missus likes it.

Any informative opinions would therefore be appreciated. If you bought a brand such as Sosandar (LON:SOS) now do you think you would still be using them in 5-10 years? And if not, does that mean the key target for Sosandar (LON:SOS) is to constantly target new customers to replace the old?

Ta
A

peterg

13th Jan '19

Certainly! M&S and Cotswold cover nearly all my requirements, and have for years.

Cuthbert C

Peter

"...M&S and Cotswold cover nearly all my requirements…"

Nearly all is not enough. You've obviously got large requirements. Perhaps you should try the next size up and see if that covers everything?

FoolishBen

I'm quite into fashion and to answer your question simply, the answer is yes. Although as a 33 year old man I'm definitely not in Sosandar (LON:SOS) target market, I do think I know enough about the industry to suggest that amongst most people who like their clothes, there is a great deal of brand loyalty. I'd say half my wardrobe is from All Saints and the first time I shopped there was about 12 years ago. They have definitely had several hundred pounds from me every year since then. I've also bought several items of clothing from about 3 other brands in each of the last 4-5 years. My girlfriend, also 33, is very loyal to American Apparel (To the point where she continued to order their clothes from America when they closed their UK stores), Reiss and Zara and has been for the duration of our 8 years together. With that in mind, I do find the fact that Sosandar clearly appeal to a wide age range very interesting as they will be able to benefit from this loyalty, retaining their customers far longer than Boohoo, who my girlfriend may have shopped in 10 years ago if it we're around but definitely wouldn't now as a 33 year old.

Disclosure: I no longer hold Sosandar (LON:SOS) as I had a bit of a trim during the recent volatility but it's firmly on my watchlist and a share I am likely to own again at some point in the future.

Hi Ben

That's great insight, thanks for sharing. In hindsight I perhaps should have asked people to include their partner's fashion loyalties within their response for more insight!

It will certainly be worth keeping an eye out for the Sosandar (LON:SOS) repeat orders # going forward.

Cheers

Zafariqbal

23rd Jan '19

Excellent write up.

However , can I ask one question ?
To day is 23rd of January and the share price is consistently coming down . Is there any specific reason for this or it is just simple volatility .

Is it time to add more shares ?

3rd Apr '19

Has anyone got any idea when the next report will be out?

Small Cap Value Report (Wed 9 Jan 2019) - SOS

Sosandar (LON:SOS)

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Paul Scott

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