The key take for me was the 5.2 per cent rise in like-for-like sales in the nine weeks since the financial year-end, a performance that is easily tracking ahead of analyst forecast assumptions for the current financial year and comes on the back of an 8.2 per cent rise in underlying sales in the prior 12-month trading period. In part, the retailer's store refurbishment strategy is driving this momentum as these upgraded outlets generally post underlying sales growth of 10 per cent in the first year, and around 5 to 6 per cent in the second. Having updated 21 stores in the 12-month period, Moss Bros' board plans spending a further £3.3m on sprucing up a further 20 units this year. It makes commercial sense to do so given that the revamped shops have a payback on investment period of three years and deliver like-for-like sales outperformance, too. Currently, around two-thirds of the 124-strong estate is trading in the new format and this is set to rise to over 100 stores by next January.
But there are other initiatives driving growth, too. The launch of sub-brands Moss London, Moss 1851 and Moss Esquire have all strengthened the company's brand offering to underpin the level of full price sales and enhance gross margins. In fact, retail gross margin increased by 220 basis points in the financial year, largely reflecting a lower level of markdowns and improved buying. Online initiatives are helping improve channels to market, too: digital sales increased by 36 per cent last year and the segment now accounts for 10 per cent of total sales. Shoppers can also use a 'click & collect' service both on the hire side and for store purchases. It's working as site traffic, conversion and retention rates are all improving.
Clearly, Moss Bros has moved on from the early recovery stage when I first spotted the company's investment potential ('Dressed for success', 20 February 2012). So too have the shares which have risen by over 150 per cent since I initiated coverage. However, the valuation is still not stretched.
Modest earnings upgrades
Forecasts from analyst John Stevenson at brokerage Peel Hunt point towards Moss Bros' revenues increasing from £121m in the year just ended to £127m in the 12 months to 31 January 2017 to drive up adjusted pre-tax profits from £5.9m to £6.8m. On this basis, expect EPS to jump from 4.65p to 5.3p, implying the shares are rated on 20 times forward earnings estimates.
That may seem full, but Moss Bros has a cash-rich balance sheet with net funds of £17.3m, or 17.4p a share, so the cash adjusted forward PE ratio drops to 16. But even that rating fails to tell the whole story because this is a highly cash-generative business and cash profits of £12.4m were more than double pre-tax profits of £5.9m last year, reflecting non-cash depreciation and amortisation charges of £6.6m. This means that the company can pay out more than its net profits as dividends and still have funds available to reinvest in store refits and capital expenditure. And this is exactly what the board has been doing as the declared payout of 5.55p exceeds reported EPS of 4.65p, but is still less than half cash profits per share of 12.5p. It was the highly cash-generative business model that attracted me to the company in the first place, as was the potential to recycle cash flows back into the business.
The bottom line is that Moss Bros' shares offer a 5.4 per cent dividend yield and a prospective yield of 5.7 per cent based on forecasts of a raised payout of 5.8p in the current financial year. That's attractive as is an enterprise value (market capitalisation less net funds) to cash profit ratio of 6.8 times, falling to 6.3 times based on cash profits rising to £13.3m in the current year. This is my preferred way of valuing the business given the cash-rich balance sheet and chunky non-cash charges that subdued the pre-tax profit line.
So, having updated the investment case post an upbeat pre-close trading update ('An awesome foursome', 18 January 2016), and given a target price of between 120p to 130p at the time, I have no reason to change my positive stance. On a bid-offer spread of 100p to 102p, I rate Moss Bros shares a buy.
Please note that I have published 34 columns in the past three weeks, all of which are listed below.
