The gains look fully justified as the company is moving seamlessly from recovery to growth. Analysts clearly believe there is potential for further gains too: John Stevenson at brokerage Peel Hunt raised his target price from 115p to 140p post the trading update; Freddie George at Cantor Fitzgerald upgraded his target price from 115p to 130p; and John Cummins at WH Ireland is maintaining his target of 140p. All three broking houses have a buy recommendation on the shares, a view that is warranted based on the latest trading news.
In the 16 weeks to mid May, the company’s underlying sales rose 6.3 per cent on the same period last year driven by an eye-catching 8.5 per cent increase in retail sales. Following the launch of a new retail website, e-commerce sales more than doubled in the period and now comprise 6.5 per cent of total sales, up from 3.3 per cent a year ago. Interestingly, the Moss Bros mobile site accounted for 9 per cent of all online sales, having only launched in May 2013. Another positive trend is the growth in overseas sales which now account for 6.5 per cent of online revenues. New sites are now operational in Eire, Sweden, Denmark, Holland and Australia. I also understand that traffic flow, conversion and customer retention rates are all on an upward trajectory which can only be good for future prospects.
It’s also worth flagging up that the store refurbishment programme continues to deliver bumper returns. So far this year a further seven stores have been refurbished to bring the total to 45 outlets out of an estate of 135 stores. Upgraded stores are expected to deliver like-for-like sale growth of between 8-10 per cent in year one, and above average in the following two years. This means they in effect pay for themselves over this three-year period since the cost of each store refit varies from £40,000 to £240,000 depending on the size of the store. There is also scope for a further boost to profits as store leases some up for renewal. That’s because leases on half of the estate expire between 2013 and 2016, so Moss Bros is in a very good position to play hardball with landlords in renegotiating lower rents. Alternatively, the company can simply relocate to new premises which offer better footfall and scope to drive sales higher. Either way, it’s a win-win situation. It also means that poor performing non-core stores can be closed which in turn improves the financial performance of the company as the capital tied up in these can be invested into far more profitable stores elsewhere.
Yet another positive of the strong retail sales trends is that retail gross margins are improving due to lower markdowns on inventories. Indeed, I understand that like-for-like gross profits are currently 6 per cent ahead of the same period last year. I would expect this strong margin performance to continue especially since the company has invested in new products to widen its appeal such as launching a slim fit contemporary range aimed at a younger audience. The autumn range will include new brands: Moss London, Moss 1851 and Moss Esq. labels.
Moreover, the launch of a new customer relationship management (CRM) system in the second half of this year will create a single new centralised customer database and one that can be exploited to deliver far greater levels of personalisation, both online and instore. It should also generate cross selling opportunities by leveraging off the company’s database to target market customers far more efficiently. For instance, targeting hire customers with specific retail offers.
A strong investment case
The aforementioned business specific drivers have been feeding through to an equally impressive financial performance. In the fiscal year to end January 2014, Moss Bros reported annual cash profits of £9.3m, up from £7.9m the prior year and £5.8m in the 12 months to end January 2012. Underlying pre-tax profits jumped a third to £4m last year. Please note the difference between the pre-tax numbers and the cash profits can be largely attributed to a non-cash depreciation and amortisation charge of £5m and a £400,000 credit for onerous leases.
Profits are expected to jump again this year too. Mr Stevenson at broking house Peel Hunt predicts current year pre-tax profits of £4.4m on revenues of £116m, up from £4m and £109m in fiscal 2014, to generate EPS of 3.3p. The respective forecasts for fiscal 2015/16 are for pre-tax profits of £5.7m on turnover of almost £120m to produce EPS of 4.3p. The faster profit growth next financial year reflects the full upside from the ongoing accelerated store refurbishment programme, margin enhancement as leases are renewed on better terms and the natural operational gearing effect on profits of higher sales.
Admittedly, the shares may look pricey on 28 times 2015/16 earnings estimates. However, that ignores the robust cash generation of the business that lifted the cash file by 10 per cent last financial year to £28.3m, and that was after investing in 13 store refits! The current cash pile alone is worth 28p a share, so after adjusting for this the cash adjusted prospective PE ratio drops to 21. But even that rating fails to correctly value the business. That’s because annual cash profits of £9.3m only equates to a modest 10 times Moss Bros’ enterprise value (market value of £120m less net cash of £28m). And with cashflow robust enough to cover all of the store refit programme and more, the board are now returning a chunk of its cash profits back to shareholders.
In fact, a final dividend of 4.7p a share will be paid to shareholders on 28 June (ex-dividend date of 4 June). For the current financial year, analysts are predicting a rise in the annual payout from 5p to 5.2p a share, increasing to 5.4p the year after. On this basis, the forward dividend yields are 4.3 per cent, rising to 4.5 per cent. It could conceivably be more as analysts predict annual pre-tax profits will rise by two thirds from £4m in the 12 months to end January 2014 to £6.7m by January 2017. If achieved cash profits would increase even further to £11.3m, thus adding 2p a share of annual cashflow that could be used for dividend payments.
A promising technical set-up
For good measure, the technical set-up is equally promising as there is no overhead resistance at all until around 131p, a high dating back to February 2005. So with the company’s earnings in an upgrade cycle, and the management team having a plan in place to grow profits by investing in new initiatives and store refits, then I have no hesitation at all at maintaining a buy recommendation.
My initial target price is now 130p and if surpassed I would advise running your profits until analysts target prices of 140p. Please note that the next trading update from the company is scheduled for 22 September when Moss Bros issues its interim results. Trading on a bid offer spread of 121p to 122p, I continue to rate the shares a buy.
■ Simon Thompson’s new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
