The company has just reported pre-tax profits of £1.95m in the six months to end July, a £224,000 profit shortfall on the same period in 2013 despite revenues increasing by 4.6 per cent to £55.8m. But the reason for this is actually positive. That’s because the company forfeited £300,000 of gross margin in the period by shutting nine stores for refurbishment (compared to four in the same period of 2013), taking the number of stores trading in the new format stores to 49. A further 14 units will be refurbished in the second half which means that almost half the estate of 133 outlets will have been refurbished by the end of January next year.
That’s important because Moss Bros’ management team, under the leadership of chief executive Brian Bick who has masterminded the turnaround in the company’s fortunes, rightly point out that refurbished stores immediately deliver a sales increase of between 8 to 10 per cent in the first year. They also deliver outperformance in the second and third years too. This means in effect store refurbishments 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 unit. There is also scope for profit uplifts as store leases come up for renewal. That’s because leases on half of the estate expire between now and 2016, so a financially strong Moss Bros is very well placed to negotiate lower rents.
Furthermore, with 23 stores being refurbished in the current financial year, this adds significant weight to a better than expected performance in the coming 12 months than analysts are currently factoring in. For instance, analyst John Stevenson at brokerage Peel Hunt predicts that Moss Bros will lift pre-tax profits by 10 per cent to £4.4m on a five per cent rise in revenues to £115.8m in the 12 months to end January 2015 and deliver EPS of 3.3p. However, for the next fiscal year Mr Stevenson is only factoring in a 3 per cent increase in turnover to £119.4m, implying like-for-like sales growth of less than one per cent.
Conservative forecasts
That looks way too low to me because in the first half alone Moss Bros delivered underlying sales growth of 6.4 per cent, buoyed by retail sales which jumped 8.5 per cent on a like-for-like basis. Clearly, online initiatives are helping drive part of this growth as internet sales doubled in the latest six month period and now account for just under 7 per cent of Moss Bros’ total sales. International sales are a growing part of the internet offering and mobile traffic is too. Moss Bros was also the first retailer to add ‘Login & Pay with Amazon’ functionality to its offering, so making it easier for customers to transact.
Importantly, the company continues to develop new products and recently launched and well received sub brands – Moss London, Moss 1851 and Moss Esquire – are likely to underpin retail growth. A more targeted marketing campaign will help too as the company takes advantage of its ‘single customer record database’ which has now been launched across the business. It seems to be working because underlying sales have continue to maintain their first half progress and are currently 6 per cent ahead in the seven weeks since the half year end.
But even if Moss Bros only meets analysts’ low ball revenue and profit forecasts, this still means that pre-tax profits are forecast to rise from £4.4m in the current fiscal year to £5.7m in the 12 months to end January 2016 to drive up EPS by 30 per cent to 4.3p. And because the company’s cash generation is robust, and the balance sheet is rock solid - net cash of £22.8m equates to around 23p a share - the board can pursue a progressive dividend policy. In the first half the interim payout was lifted six-fold to 1.7p a share and analysts predict a 5.2p a share full-year payout. The respective forecast for fiscal 2016 is 5.4p a share.
In other words, Moss Bros’ shares offer a prospective dividend yield of 5.6 per cent and are priced on a cash adjusted 16 times fiscal 2015/16 earnings estimates, a rating that fails to factor in the real possibility that revenue and margin growth will be far better than current analysts estimates imply.
Upside potential
In the circumstances, I have no reason at all to alter my positive stance, having initiated coverage when the price was 39p (‘Dressed for success’, 20 February 2012). I last updated the investment case when the shares had risen into my fair value price range of 120p to 130p (‘A chic performance’, 28 May 2014). True, they have been weak since then as investors’ banked profits. However, on a bid-offer spread of 93p to 93.5p, and with the 14-day relative strength indicator on the floor, I feel that the price decline is not just overdone, but these results should act as the catalyst to spark a much overdue rerating.
Analysts are thinking the same way: John Cummins at W.H. Ireland and John Stevenson at Peel Hunt both have 140p share price targets; Nick Bubb at Cantor Fitzgerald has a target price of 130p; and Peter Smedley at Charles Stanley Stockbrokers considers the shares a long-term buy given “the business has potential to deliver 20 per cent earnings growth annually over the next 2-3 years.” I could not agree more and rate Moss Bros shares a strong buy on a six month basis and offering 38 per cent upside to my 130p a share target price.
■ 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'
