Home furnishings and fashion retailer Laura Ashley (ALY) was left out of the re-rating enjoyed by the general retail sector last year. As earnings upgrades streamed out for recovery plays like Dixons (DXNS), Laura Ashley seemed to flatline. Some of that was down to the bizarre weather patterns in spring and summer. But like-for-like sales continued to slide into autumn and winter, and even crucial online sales dropped - an area where most retailers can at least count on decent growth. It worries us that management has not set out a clear strategy for tackling these problems, but of more concern was the recent disposal of Laura Ashley's entire shareholding in Moss Bros to "enhance" its financial position, use for additional working capital and for "other purposes", quickly followed by a special dividend to show shareholder “appreciation". To us, this suggests trouble at mill.
- Massive dividend yield
- Net cash
- Weak online sales growth
- Falling LFL sales
- No clear strategy
- Dividend unsupported by earnings
- Recent disposal to raise cash
After a soggy start to the year, Laura Ashley had an equally dismal second half. Comparable retail sales in the 19 weeks to 7 December fell 0.7 per cent. Online sales, which account for roughly 14 per cent of the total, managed just 1 per cent growth after a first-half decline. As of 7 December 2013, like-for-like sales for the financial year were running 1.6 per cent lower, a stark contrast to peer Next's (NXT). Admittedly, much of second-half profitability is generated over Christmas and January, but we’re not convinced this will have offset the poor trading which dominated the year - particularly given the unprecedented level of promotional activity in the run up to the holidays.
| LAURA ASHLEY (ALY) | ||||
|---|---|---|---|---|
| ORD PRICE: | 26p | MARKET VALUE: | £194m | |
| TOUCH: | 25-26p | 12-MONTH HIGH/LOW: | 28p | 21p |
| DIVIDEND YIELD: | 9.6% | FWD PE Ratio: | 13 | |
| NET ASSET VALUE: | 7p | NET CASH: | £17.8m | |
| Year to 26 Jan | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p)* |
|---|---|---|---|---|
| 2010 | 268 | 11.0 | 0.80 | 1.0 |
| 2011 | 285 | 24.1 | 2.65 | 1.5 |
| 2012 | 286 | 18.4 | 1.79 | 2.0 |
| 2013 | 299 | 20.1 | 2.02 | 2.0 |
| 2014** | - | 20.0 | 2.04 | 2.5 |
| % change | na | - | +1 | na |
Normal market size: 10,000 Matched bargain trading Beta: 0.46 *Dividends declared in 2014 to date, including bonus dividends **Cantor Fitzgerald forecasts, no forecasts available for dividend and turnover | ||||
The yield is another concern. Currently pushing an eye-watering 10 per cent, it's the most generous in the sector. But such a high payout makes us uncomfortable. Should poor trading persist - pre-tax profit declined 11 per cent at the half year stage and is likely to be flat or slightly lower for the full year - the dividend will be unsupported by earnings. In fact, dividends declared and paid out so far this financial year of 2.5p a share are already unsupported by earnings forecasts for the year of 2.04p a share.
True, there’s the net cash pile of £17.8m and proceeds from the Moss Bros disposal would have generated some £8m. But that money should be diverted towards investing in the brand and the product offering, rather than keeping shareholders appeased. After all, Laura Ashley’s image has faded significantly since its peak in the 1990s. The bonus dividend paid in February felt particularly disconcerting as the aim was to "show appreciation to the shareholders for their continued support,” which to us suggests management is doing everything it can to keep investors happy in the absence of any foreseeable growth. Finally, we have yet to see a clear strategy to stem falling sales and refresh the brand. The shares are trading on a bargain 13 times forward earnings, but for good reason.
