It was therefore with great interest that I noted both the finance director and chief executive of one of the UK’s leading home shopping retailers, Ideal Shopping Direct, have been digging deep into their pockets to purchase shares (TIDM: IDS – 86.5p) in the company. In fact, CEO Mike Hancox splashed out £400,000 two weeks ago buying 500,000 shares in the company at 80p, while top bean counter Ian Jebson invested £32,000 buying 40,000 shares at the same price. Given that Ideal Shopping is only capitalised at £25.5m, this is a significant investment by these two insiders and one that warrants further investigation.
It’s worth pointing out that Mr Hancox has been in the top job for a year now, having been brought in late last year to turn around a company that managed to post a pre-tax loss of over £13m on £94.5m of sales in 2008. Admittedly, around £9.2m of that loss resulted from what was a pretty extensive kitchen sink operation. The list of exceptional charges booked last year included: £2.75m of stock write downs; £750,000 of restructuring costs; almost £700,000 for planning permission costs on an aborted new warehouse project; over £1.1m write-off on IT systems; £1.5m goodwill impairment charge; and £750,000 for doubtful debts. There was even a £614,000 charge for loss of bank deposits which resulted from the collapse of Icelandic banks Kaupthing and Singer & Friedlander. The good news on that front is that in July the company received £157,000 as a partial recovery of that loss.
Moreover, the restructuring programme is bearing fruit with Ideal Shopping’s stock levels cut to around £3m at the end of June, down from £7.2m a year ago. This has been achieved by reducing the warehousing facilities from nine units down to three and passing more of the inventory risk onto suppliers. In turn the working capital situation has improved and contributed to a net cash inflow of £794,000 in the first six months of this year. So although Ideal Shopping reported a first half loss of £1.2m – down from an underlying loss of £2.7m in the second half of 2008 – the important point is that the company still generated around £100,000 cash from its operations, before tax receipts and acquisition of assets. This helped to bolster its balance sheet with net cash around £7.5m at the end of June so there are no financing issues to cloud the operational performance.
Having stabilised the business the plan now is to drive sales and return the company back to profitability by repositioning the business as a multi-channel retailer in order to maximise earnings from a number of revenue streams. These include Ideal Shopping’s main channel, Ideal World, which is broadcast to 23m households on the Freeview, Sky, Virgin Media and Freesat platforms. The company also has three other channels on Sky as well as transactional websites www.idealworld.tv and www.createandcraft.tv which both carry a live stream of the broadcasts.
Through these distribution channels the company currently has a 6 per cent share of the UK TV shopping market which is worth in total £1.4bn a year. Ideal Shopping also generates 25 per cent of its sales through the internet, predominantly from customers aged over 50, and this continues to be the primary growth area of the company. But the main problem the business faced has not been acquiring new customers – for instance, last year 330,000 new customers were recruited – but improving both the product range and the customer experience.
So to enhance the variety of goods offered across a wide range of price points, Ideal Shopping has been running broadcast trails with a number of leading high street retail brands. Apart from attracting and maintaining viewers to its television and internet platforms, this also has the benefit of providing a revenue stream without taking on the stock risk. And customer satisfaction has been improved by moving the unpopular overseas call centre back to the UK and by reintroducing customer agents for call handling rather than using an automated phone ordering system. Also, in May, the company did a deal with Cellcast to sell overnight airtime on its Freeview channel between 12am and 5am each day to bring in another useful source of revenue.
As always the critical trading period for almost all retailers is the final quarter of the year as this includes Christmas. Ideal Shopping is no different and as the company quite rightly pointed out in its first half results – issued on 23 September – the performance for this period has yet to ‘unfold’. That said, for Mr Hancox to have invested £400,000 of his hard earned cash buying shares only five days after those results were announced indicates that he must be pretty confident that the turnaround is on track. And given that prior to joining Ideal Shopping he had successfully turned around Otto UK, the world's largest home shopping retailer, he also has a track record in this area. That’s reason enough to follow his lead and buy the shares.
* The October correction in equity markets has proved nothing other than a minor blip in the seven month cyclical bull market. So although I have great reservations about the sustainability of this global stock market surge (Bond Market Warnings, 5 October 2009), it now looks highly probable that the markets will try and power on even higher in the near term. In the circumstances, the uptrend is still intact and I would advise closing the index short I recommedend (at 1064) on the S&P 500 at a 10 point loss (Time for Caution, 21 September 2009).
